## Fiscal Transparency Evaluation — Mexico (cr18289) ## Source details **Canonical URL:** [Fiscal Transparency Evaluation — Mexico (cr18289)](https://www.imf.org/-/media/files/publications/cr/2018/cr18289.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18289.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18289.pdf.json) --- ### PREFACE - Mission: Fiscal Transparency Evaluation (FTE) covering all pillars of the IMF’s Fiscal Transparency Code, including Pillar IV due to material petroleum revenues. - Requesting authority: Ministry of Finance and Public Credit (SHCP) of Mexico. - Information current as of February 2018; data in report are IMF mission team estimates unless otherwise specified. - Mission period: February 1-16, 2018. Mission Head: Mr. Sailendra Pattanayak. - IMF FAD team members: Ms. Eliko Pedastsaar; Ms. Alpa Shah; Ms. Concha Verdugo Yepes; Mr. Richard Allen; Mr. Felipe Bardella; Mr. Rolando Ossowski. Additional participant: Mr. Costas Christou (WHD). - Authorities and institutions consulted: SHCP (multiple units listed), SENER, PEMEX, CNH, SEMARNAT, SEGOB, Banco de México, CEFP, IBD, BANOBRAS, NAFIN, BANSEFI, SF de la CDMX, ASF, CNBV, IPAB, FMP, among others. - Acknowledgements: Mr. Julio Cesar Ruiz Alvarez, Mr. David Francisco Morales Ruiz (SHCP), Ms. Florencia Leyson. ### EXECUTIVE SUMMARY — Overview and Aggregate Assessment - Assessment against the IMF Fiscal Transparency Code (48 principles across four pillars): - Basic: Mexico meets 16 principles. - Good: Mexico meets 9 principles. - Advanced: Mexico meets 15 principles. - Does not apply: 1 principle. - Strengths: resource revenue management and fiscal forecasting and budgeting. - Weaknesses: fiscal risks analysis and management; seven principles do not meet basic practice. - Ten key recommendations summarized (see Pillar-specific lists below). ### PILLAR I — Fiscal Reporting: Main Findings - Strengths: - Fiscal statistics disseminated monthly. - Financial statements published four months after fiscal year end. - Fiscal statistics comparable with fiscal forecasts and budget plans. - Mexico has complied with the IMF SDDS for fiscal statistics since 2000. - Tax expenditures fully disclosed annually. - Weaknesses / Gaps: - Coverage incomplete for institutions, stocks and flows. - Subnational sector excluded from consolidated fiscal reports despite accounting for 35 percent of total public sector spending (net of transfers). - Omitted or partially reported items (examples): - Subsoil assets: 11 percent of GDP (PEMEX estimates, end-2016). - PPP liabilities: 0.2 percent of GDP. - Pension liabilities (actuarial): 47 percent of GDP (total); only 8.7 percent of GDP reported in statements. - Government securities reported at face value only; accounting asset related to discount on long-term T-bond: 6.3 percent of GDP. - Financial statements are not consolidated across subsectors. - Lack of compliance with international classification standards; bridging tables exist but were not published at mission time. - Key quantified effects: - If missing items included, federal government net worth would increase by about 7 percentage points of GDP. - Published Cuenta Pública (Tomo II) reported negative net worth of 21 percent of GDP by December 2016; staff adjustments would improve net worth by 7.8 percent of GDP. - Consolidated public sector estimated net worth: negative 50 percent of GDP; total estimated liabilities about 123.9 percent of GDP; estimated assets about 73.9 percent of GDP. - Priority recommendations (selected): - Recommendation 1.1: Consolidate the general government and the public sector in fiscal reports. - Recommendation 1.2: Improve coverage of stocks and flows by including missing assets, liabilities and fiscal flows. - Recommendation 1.3: Publish fiscal statistics by GFSM/COFOG-consistent economic and functional classifications. - Key table of aggregate/subsectoral figures (percent of GDP; numbers preserved): - Public Sector — Revenue: 28.8; Expenditure: 32.9; Balance: -4.0; Net expenditure: 32.9; percent net expenditure: 100.0 - General government — Revenue: 23.7; Expenditure: 26.4; Balance: -2.7; Net expenditure: 24.6; percent net expenditure: 75.0 - Central government — Revenue: 20.5; Expenditure: 23.6; Balance: -3.0; Net expenditure: 12.9; percent net expenditure: 39.3 - Budgetary central government — Revenue: 17.7; Expenditure: 20.6; Balance: -2.8; Net expenditure: 7.1; percent net expenditure: 21.5 - Social Security — Revenue: 4.4; Expenditure: 4.2; Balance: 0.2; Net expenditure: 4.2; percent net expenditure: 12.7 - State governments — Revenue: 10.1; Expenditure: 9.9; Balance: 0.2; Net expenditure: 9.9; percent net expenditure: 30.0 - Local governments — Revenue: 1.9; Expenditure: 1.9; Balance: 0.1; Net expenditure: 1.9; percent net expenditure: 5.6 - Nonfinancial public corporations — Revenue: 9.9; Expenditure: 11.2; Balance: -1.2; Net expenditure: 7.6; percent net expenditure: 23.0 - Other financial public corporations — Revenue: 1.5; Expenditure: 1.4; Balance: 0.1; Net expenditure: 0.2; percent net expenditure: 0.6 ### PILLAR I — Specific Coverage and Accounting Issues (selected) - Major omissions and valuation issues: - Subsoil assets unreported: 11 percent of GDP (PEMEX estimates, end-2016). - Nonfinancial assets: fixed assets and land valued at historic cost; some Executive Branch assets not depreciated per CONAC, leading to overvaluation. - ASF found unverified stocks ≈ 2.5 percent of GDP in highways infrastructure (2016 audit cycle). - Banxico Treasury securities and T-bonds: 87% of debt securities long-term T-bonds registered at face value; T-bonds sold to Banxico accounted for 4.9 percent of GDP placed in market and additional 20 percent of GDP held by the bank (monetary operations). - Cash-to-accrual and coverage adjustments would increase public sector deficit by 3.5 percent of GDP in 2016; alternative treatment of ROBM and FEIP hedging raises cash deficit to 4.1 percent of GDP; including accrual of pension entitlements and PPPs would raise net borrowing to 6.3 percent of GDP. - Tax expenditures: - Total tax expenditure in 2018 estimated at around 3.5 percent of GDP. - Tax expenditures as share of total tax revenues: 26.6 percent. - VAT-related tax expenditures ≈ 1.5 percent of GDP (~45 percent of total tax expenditures). ### PILLAR II — Fiscal Forecasting and Budgeting: Main Findings - Strengths: - Comprehensive legal framework; timely and comprehensive budget documentation. - Fiscal policy anchored in a fiscal consolidation plan and three fiscal rules since 2014. - Well-developed performance information and evaluation system (658 programs; nearly 5,000 performance indicators; about 2,000 strategic indicators). - Management of investment projects transparent; citizen’s guide and Transparency Portal maintained. - Weaknesses / Gaps: - Medium-term budget framework (MTBF) rudimentary; MTFF exists but MTBF elements limited. - Macroeconomic and fiscal forecasts focus mainly one year ahead; forecasts subject to substantial deviations. - Little independent evaluation/validation of forecasts and compliance with fiscal targets. - No publication reconciling current forecasts with previous vintages. - Forecast accuracy (numeric): - Real GDP forecast one year ahead: average absolute deviation over last 7 years was 1.2 percentage points; yearly deviations: 2010: -2.1; 2011: -0.2; 2012: -0.5; 2013: 2.1; 2014: 1.2; 2015: 1.1; 2016: 1.0; average: 0.4; average of absolute values: 1.2. - Inflation absolute deviations (selected years): average of absolute values: 0.8. - Over last 7 years average absolute deviation in annual revenue and expenditure forecasts was around 5%. - Key recommendations: - Recommendation 2.1: Strengthen MTFF and MTBF; develop Pre-Criteria into an annual fiscal strategy statement; separate cost of new policy proposals from baselines; set indicative ceilings; publish medium-term projections. - Recommendation 2.2: Strengthen independent validation mechanisms for macroeconomic and fiscal forecasts (options include publishing alternative forecasts, stakeholder committee, ASF quarterly assessments). - Publish reconciliation of forecast vintages and improve linkage of tax-expenditure report to budget documents. ### PILLAR II — Budget Calendar and Parliamentary Process (selected) - Statutory timetable: - April 1: Pre-Criteria submission. - September 8: Draft budget submitted to Chamber of Deputies. - November 15: Budget approval (complied with in recent years). - Legislative behavior and in-year adjustments: - Chamber amendments averaged around 4-5 percent of the approved budget in recent years. - Executives’ in-year adjustments allow executed budgets to be on average 7 percent higher than approved budget over past decade. - Public participation and transparency: - Citizen’s Guide published annually since 2010; Transparency Portal launched July 2011 (nearly 900,000 visits in 2017). - Mexico’s score: 44/100 in 2016 World Bank Voice and Accountability Index; 39/100 in 2017 OBI public participation index. ### PILLAR III — Fiscal Risk Analysis and Management: Main Findings - Overall assessment: Fiscal risk analysis and management practices are in their infancy and need strengthening. - Macroeconomic risks and sensitivities: - Petroleum revenue share ~ one-third of total revenues (2003-16 average); fiscal oil revenue fluctuated between 3½ percent of GDP and 10½ percent of GDP. - Volatility of Mexican crude basket: 31 percent (1999-2016, standard deviation of percentage change). - Example sensitivity impacts (2018, percent of GDP): - Oil price +US$1/b (revenue) 0.07 - Oil production +50 mbd (revenue) 0.06 - Interest rate +100 basis points (expenditure) 0.09 - Growth +½ percentage point (tax revenue) 0.06 - Exchange rate ten-cent appreciation: -0.01 - Plan Anual de Financiamiento includes stochastic projection (fan chart) of net public debt. - Specific fiscal risks — disclosure partial: - Selected explicit fiscal risks (gross exposure, 2017): - Legal claims: cost 50 billion MXN; Percent of GDP: 0.2 - Debt guarantees (FARAC/FONADIN): 256 MNX billion; Percent of GDP: 1.2 - Development Banks: 1,215 MNX billion; Percent of GDP: 5.6 - Total selected explicit fiscal risks: Gross exposure 1,152 MNX billion; Percent of GDP: 6.6 - Memorandum item — pensions: Gross exposure 9,166 MNX billion; Percent of GDP (2017) 47 - No comprehensive disclosure of risks from subnational governments, public corporations, non-debt liabilities, or trust funds. - Long-term sustainability: Not Met - No long-term fiscal sustainability analysis or projected evolution of overall net worth in budget documents beyond next fiscal year and following five years. - Actuarial pension liabilities estimated at 46.9 percent of GDP (2016). - Public healthcare projected to rise from 3.3 percent of GDP (2015) to 8.7 percent of GDP by 2065. - Risk management strengths: - Oil hedging program provided benefits of 0.5 percent of GDP (2009), 0.6 percent (2015), 0.3 percent (2016). - Legal cap on government borrowing; debt rules for subnationals; issuance of guarantees controlled by law; PPP quantitative limits. - Financial Stability Council monitors banking sector; biannual financial stability reports published. - Disaster risks quantified internally (FONDEN/R-FONDEN). - Key recommendations: - Recommendation 3.1: Strengthen macroeconomic risk analysis; present alternative scenarios and combined shocks. - Recommendation 3.2: Prepare and publish a summary report quantifying main specific fiscal risks and a strategy to manage them; establish a risk management unit. - Recommendation 3.3: Establish a comprehensive framework for financial governance and oversight of non-financial public corporations. - Table 3.7 (selected assessments & importance; preserved categorizations): - 3.1.1 Macroeconomic risks: Assessment = Basic; Importance = High. - 3.1.2 Specific Fiscal Risks: Assessment = Basic; Importance = High. - 3.1.3 Long-Term Fiscal Sustainability Analysis: Assessment = Not met; Importance = Medium. - 3.2.1 Budgetary contingencies: Assessment = Advanced; Importance = Low. - 3.2.2 Asset and Liability Management: Assessment = Basic; Importance = High. - 3.2.3 Guarantees: Assessment = Not met; Importance = Medium. - 3.2.4 PPPs: Assessment = Advanced; Importance = Medium. - 3.2.5 Financial Sector Exposure: Assessment = Good; Importance = Medium. - 3.2.6 Natural Resources: Assessment = Basic; Importance = Medium. - 3.2.7 Environmental Risks: Assessment = Basic; Importance = Low. - 3.3.1 Sub-National Governments: Assessment = Basic; Importance = High. - 3.3.2 Public Corporations: Assessment = Basic; Importance = Medium. ### PILLAR III — Assets, Liabilities, Guarantees, Trust Funds, and Banxico Interactions (selected numeric facts) - Public sector estimated liabilities: about 123.9 percent of GDP. - Debt securities: 52.3 percent of GDP. - Pension liabilities: 46.9 percent of GDP. - Loans: 12.7 percent of GDP. - Estimated public sector assets: 73.9 percent of GDP. - Fixed assets: 39.9 percent of GDP. - Petroleum reserves: 11.3 percent of GDP. - Financial assets: 34.0 percent of GDP. - Non-organic trust funds: net worth ≈ 2.7 percent of GDP (about 340 funds; 245 federal public sector funds). - Guarantees (end-2017): recorded federal government guarantees ≈ 6.6 percent of GDP (components include FARAC/FONADIN 256 billion MXN; government-guaranteed development bank debt 890 billion MXN; mortgage securitizations/risk capital ≈ 325 billion MXN). - Deposit insurance potential liability (IPAB): up to 2,225 billion MXN = 10.25 percent of GDP. - Development banks aggregate liabilities: 860 billion MXN = 4 percent of GDP (2016); contingent liabilities induced credit: 177 billion MXN = 0.8 percent of GDP. - Banxico-related figures (Appendix II): - Banxico capital transfers (ROBM): around 1.2 and 1.5 percent of GDP in 2016 and 2017 respectively. - Stock of T-bonds sold to market by Banxico: about 4.9 percent of GDP end-2016. - Stock of non-marketed T-bonds held by Banxico: around 20 percent of GDP end-2016. - From 2011 to 2016 stock of T-bonds managed by Banxico increased from 13 percent of GDP to 25 percent of GDP. - Banxico’s profits since 2014 averaged about 2.1 percent of GDP a year, driven by unrealized FX revaluation gains. ### PILLAR IV — Resource Revenue Management: Main Findings - High level of transparency in petroleum revenue management: - Clear and comprehensive legal and fiscal framework; laws, regulations and contracts publicly available. - Open and competitive rights allocation; CNH publishes contract summaries and interactive maps; 71 contracts concluded as of January 2018. - All petroleum revenues accrue to the federal budget and the Mexican Petroleum Fund (FMP); FMP publishes quarterly and annual reports and financial statements. - FMP governance: Technical Committee (TC) of seven members; Bank of Mexico is fiduciary manager. - Operational and disclosure gaps: - Reconciliation issues between PEMEX and FMP reporting: PEMEX reports on an IFRS accrual basis (SEC 20-F); FMP reports cash receipts; Table 4.2 (2016, Millions of Pesos): - Exploration Fee: FMP 951 ; PEMEX 963 - Extraction Fee: FMP 41,660 ; PEMEX 43,500 - Profit Sharing Fee: FMP 264,994 ; PEMEX 304,299 - Total: FMP 307,604 ; PEMEX 348,762 - Resource revenue audit and reconciliation: Not Met — no regular reconciliation report reconciling company payments and government receipts at project level. - Oversight of PEMEX entitlements: scope to strengthen audit and verification of PEMEX production and cost reporting; recommend PEMEX report entitlement payments on a regional (ringfence) basis. - EITI: Mexico is a candidate; first EITI report scheduled for 2019; 2013 EITI standard requires project-level cash reconciliation. - FMP specifics and recommendations: - FMP transfers: ordinary transfers to ensure at least 4.7 percent of GDP petroleum revenue in budget; in practice transfers to date small (order of 1½–2 percent of GDP) and largely transferred to budget. - Extraordinary transfers and earmarking rules specified (if FMP resources exceed 3 percent of GDP, up to 60 percent of increase may be earmarked with specified shares). - FMP investment policy guidelines published February 14, 2018; benchmarks and operational investment guidelines to be specified by TC. - Recommendation 4.1: Strengthen oversight and reporting on activity under PEMEX entitlements. - Recommendation 4.2: FMP should publish the benchmark portfolio that operationalizes investment guidelines after TC issuance and publish risk management policy to limit deviations from benchmarks. - Petroleum sector numeric facts: - Mexico in 2016: 11th largest oil producer. - 2017 oil production: close to 2 million barrels per day (mpbd); domestic refined product consumption ≈ 1.4 mpbd. - Peak crude production: 3.4 mbpd in 2004. - R/P ratios (end-2016): proven reserves R/P = 9 years; proven+probable R/P = 16 years. - NPV of reserves (percent of GDP): 2011–13: 60–70 percent of GDP; 2015–16: 11–17 percent of GDP. - FMP operational costs in 2016: MEX 184 million. ### RESOURCE REVENUE ADMINISTRATION, AUDIT, AND CONTRACTING (selected) - Allocation of rights: competitive tender processes after 2014 energy reform; rounds governed by SENER/SHCP/CNH; CNH publishes tender procedures and contract summaries. - Ringfencing: PEMEX entitlements ringfenced by five regional classifications; income tax ringfencing rules apply; concern noted that PEMEX reports consolidated income tax numbers so ringfencing application unclear in practice. - Marketing of production received in kind: state marketer selected by public tender (service payments: US$0.18 per barrel of oil; US$0.020 per MMBtu of gas sold). - Audit and verification: - CNH audits production and contractors’ costs; SHCP and SAT can instruct audits; FMP does not verify PEMEX calculations; ASF conducts audits and publishes findings. - No published audit reconciliations for PEMEX entitlement payments at time of mission. ### Appendix I — Action Plan 2018–2021 (selected milestones) - Pillar I objectives: - 2018: Present available SNG fiscal data in Quarterly Fiscal Report; develop web-based SNG submission system; include FMP in Cuenta Pública; CONAC timeframe for consolidation. - 2019–2021: Consolidate subnational finances in PSBR indicators; disseminate consolidated general government statistics quarterly; include states, municipalities and Banxico in Cuenta Pública by 2021. - Responsible: SHCP. - Pillar II objectives: - 2018: Develop Pre-Criteria into annual Fiscal Strategy Statement; separate costs of new proposals from baselines; systematize performance indicators in budget negotiations. - 2019–2021: Publish medium-term spending projections; set indicative ceilings. - Responsible: SHCP. - Pillar III objectives: - 2018–2019: Strengthen macro risk analysis and present alternative scenarios. - 2018–2020: Develop methodology to quantify specific fiscal risks; establish SHCP risk management unit (2019–2020); publish annual risk report. - 2018–2021: Establish comprehensive oversight framework for non-financial public corporations; publish consolidated reports and QFAs. - Responsible: SHCP. - Pillar IV objectives: - 2018: PEMEX to report entitlement payments on regional basis; SAT/SHCP/CNH to publish audit/verification procedures; publish social/environmental assessments for new entitlement activity. - FMP to publish benchmark portfolio and risk management policy after TC issues them. - Responsible: CNH, SAT, SHCP, FMP. ### SELECTED NUMERIC HIGHLIGHTS (preserved exactly) - Total number of public sector institutional units (2016): 2,693. - Total public sector expenditure: about 33 percent of GDP. - Subnational expenditure (2016): around 11 percent of GDP; states and municipalities represent 35 percent of total public sector spending (net of transfers). - Actuarial pension liability total (2016): MXN 9,166 — 46.9 percent of GDP. - ISSSTE - PAYGO: 5,409 — 27.7 - PEMEX: 1,220 — 6.2 - CFE: 499 — 2.6 - IMSS-patrón: 1,722 — 8.8 - Other: 316 — 1.6 - Tax expenditure (2018): around 3.5 percent of GDP; 26.6 percent of total tax revenues. - Public investment: 3.4 percent of GDP in 2015; projected 2.6 percent of GDP in 2018. - PPPs: 22 projects; Total Amount Investment: 41,548.1 million pesos; projects represent about 0.2 percent of GDP. - Non-organic trust funds: net worth estimated at about 2.7 percent of GDP (≈246 federal trust funds). - Public sector consolidated liabilities estimate: about 123.9 percent of GDP; assets: 73.9 percent of GDP; consolidated net worth: negative 50 percent of GDP. - Cash-to-accrual and coverage adjustments effect on deficit (2016): increase by 3.5 percent of GDP; adjusted cash deficit 4.1 percent of GDP; augmented net borrowing including pension accruals and PPPs: -6.3 percent of GDP. *Source: IMF Fiscal Transparency Evaluation of Mexico (cr18289) — IMF Fiscal Affairs Department (information current as of February 2018).* ### PREFACE _________________________________________________________________________________________ 4 ### PREFACE ### Purpose and Scope - The mission was a Fiscal Transparency Evaluation (FTE) covering all pillars of the IMF’s Fiscal Transparency Code, including Pillar IV, because petroleum revenues are materially significant in Mexico. - The mission was carried out in response to a request from the Ministry of Finance and Public Credit (SHCP) of Mexico. - The FTE is based on information available at the time it was completed in February 2018. - Unless otherwise specified, the data included in the text, figures, and tables in the report are estimates made by the IMF mission team and not official estimates of the Mexican government. ### Mission Timing and Leadership - The mission visited Mexico City during the period February 1-16, 2018. - Mission Head: Mr. Sailendra Pattanayak. ### Mission Team - IMF Fiscal Affairs Department (FAD) team members: - Ms. Eliko Pedastsaar - Ms. Alpa Shah - Ms. Concha Verdugo Yepes - Mr. Richard Allen - Mr. Felipe Bardella - Mr. Rolando Ossowski - Additional participant: - Mr. Costas Christou, IMF Western Hemisphere Department (WHD) mission chief for Mexico, participated in the concluding meetings with the authorities. ### Authorities and Institutions Consulted - Senior officials of the SHCP, including Dr. Miguel Messmacher Linartas, Undersecretary of Finance and Public Credit, and senior officials from: - Legal Department of Expenditures (DGJE) - Performance Evaluation Unit (UED) - Budget Policy Unit (UPCP) - Government Accounting Unit (UCG) - Investment Unit (UI) - Tax Legislation Unit (ULT) - Fiscal Coordination Unit with Sub-National Governments (UCEF) - Tax Revenue Policy Unit (UPIT) - SHCP Economic Planning Unit (UPEHP) - SHCP Public Credit Unit (UCP) - SHCP Insurance Pensions and Social Security Unit (USPSS) - Fiscal Prosecutor's Office (PFF) - Nom-tax Revenue Policy Unit (UPINT) - Revenue on Hydrocarbons Unit (UIH) - Treasury of the Federation (TESOFE) - SHCP Banking, Securities, and Savings Units (UBVA) - SHCP Development Banking Unit (UBD) - Other institutions and stakeholders met: - Ministry of Energy (SENER) - PEMEX - National Hydrocarbons Commission (CNH) - Ministry of the environment and natural resources (SEMARNAT) - Ministry of the Interior (SEGOB) - Banco de México (Central Bank of Mexico) - Public Finance Studies Center of the Chamber of Deputies (CEFP) - Belisario Dominguez Institute of the Chamber of Senators (IBD) - BANOBRAS - NAFIN - BANSEFI - Mexico City Secretariat of Finance (SF de la CDMX) - Mexico’s Supreme Audit Institution (ASF) - National Banking and Securities Commission (CNBV) - Institute for the Protection of Bank Savings (IPAB) - Fondo Mexicano del Petróleo (FMP) ### Basis, Findings, and Presentation - The findings and recommendations represent the views and advice of the IMF mission team and do not necessarily reflect those of the Mexican government. - The mission expresses particular thanks to Mr. Julio Cesar Ruiz Alvarez and Mr. David Francisco Morales Ruiz from the SHCP for their support before and during the visit, and to Ms. Florencia Leyson for coordinating the finalization of the report after the mission. *Source: PREFACE, Fiscal Transparency Evaluation mission to Mexico, IMF Fiscal Affairs Department (information current as of February 2018).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overview and overall assessment - This report assesses Mexico’s fiscal transparency practices against the IMF’s Fiscal Transparency Code (FTC), including the draft pillar on resource revenue management. - Out of the 48 principles across four pillars in the FTC: - Mexico meets 16 principles at the basic level, - 9 principles at the good level, - 15 principles at the advanced level, - 1 principle does not apply. - Fiscal transparency practices are strongest in resource revenue management and fiscal forecasting and budgeting; scores on fiscal risks analysis and management are lower. - Mexico’s fiscal transparency practices do not currently meet basic practice for seven principles. ### Pillar I: Fiscal reporting — main findings - Strengths: - Fiscal statistics are disseminated every month. - Financial statements are published four months after the end of the fiscal year. - Fiscal statistics are comparable with fiscal forecasts and budget plans. - Mexico has complied with the IMF’s special data dissemination standards (SDDS) for fiscal statistics since 2000. - Tax expenditures are fully disclosed on an annual basis. - Weaknesses and gaps: - Coverage of institutions, stocks and flows in fiscal reports is incomplete. - The subnational sector is not covered by any consolidated fiscal report (except quarterly reports on expenditure financed through federal government transfers), despite states and municipalities representing 35 percent of total public sector spending (net of transfers). - Some federal government assets and liabilities and transactions are omitted—for example: - Subsoil assets: 11 percent of GDP. - PPP liabilities: 0.2 percent of GDP. - Pension liabilities are partially reported: 47 percent of GDP. - Government securities are reported at face value only. - If these missing items were included, the net worth of the federal government would increase by about 7 percentage points of GDP. - Financial statements are not consolidated. - The supreme audit institution (ASF) findings reveal concerns related to accounting practices. - Lack of compliance with international classification standards for revenues and expenditures; bridging tables exist to produce GFSM-consistent economic classification. ### Pillar II: Fiscal forecasting and budgeting — main findings - Strengths: - Comprehensive (though complex) legal framework. - Comprehensive and timely budget documentation; submission and approval timetable to Congress is observed. - Fiscal policy framework anchored in a fiscal consolidation plan and three fiscal rules in place since 2014 and are adhered to. - Well-developed performance information and evaluation system. - Management of investment projects is generally transparent; government publishes a citizen’s guide to the budget and maintains an informative Transparency Portal. - Weaknesses and gaps: - Few elements of a modern medium-term budget framework have been implemented. - Macroeconomic and fiscal forecasts focus mainly on one year ahead and are subject to substantial deviations compared to outturns. - Mechanisms for independent evaluation or validation of macroeconomic and fiscal forecasts and compliance with fiscal targets/rules are underdeveloped. - No information published on reconciliation of current forecasts with previous vintages. ### Pillar III: Fiscal risk analysis and management — main findings - Overall: Fiscal risk analysis and management practices are in their infancy and need strengthening. - Current disclosures and practices: - SHCP publishes basic macroeconomic risk analysis with small-variable sensitivities and a stochastic projection of net public debt in the medium term. - Several specific fiscal risks are disclosed, though disclosure is not comprehensive and links to fiscal forecasts are unclear. - No information on long-term sustainability of public finances or projected evolution of overall net worth in budget documents. - Analysis of risks around non-debt liabilities and financial and non-financial assets is not publicly available, including potential risks associated with the assets and liabilities of the 246 federal non-organic trust funds whose net worth represents about 2.7 percent of GDP. - Public development banks had aggregate liabilities of 4 percent of GDP in 2016; these risks and central government exposure need close monitoring. - Sub-national governments represent about 11 percent of GDP; comprehensive information on their financial condition is not regularly collected and published. - No comprehensive framework exists for financial oversight of public corporations. - Strengths in risk management: - The oil hedging program has been an important element of short-term macroeconomic risk mitigation. - Statistics on oil and gas reserves and long-term production projections are published annually. - Legal cap on government borrowing authorized by Congress; specific debt rules for subnational governments. - Issuance of guarantees is controlled by law and the government’s gross exposure to guarantees is published. - PPP regulatory framework strengthened recently with a quantitative limit on new PPP obligations. - Financial Stability Council monitors the banking sector and publishes biannual reports with indicators of financial soundness. - Risks of natural disasters are quantified (though not published); information exists on the national disaster risks financing strategy. ### Pillar IV: Resource revenue management — main findings - High level of transparency in petroleum revenue management: - Clear and comprehensive legal and fiscal framework for the petroleum sector. - Open and competitive rights allocation and disclosure practices. - All petroleum revenues accrue to the federal budget and the Mexican Petroleum Fund (FMP); revenues that finance spending are allocated through the annual budget. - The FMP has clear governance arrangements, operational rules, and publishes quarterly and annual reports and financial statements. - Areas needing attention: - Continue implementation of the EITI standards. - Scope for more detailed reporting and oversight of PEMEX’s activities under the entitlement regime. - Possibility of larger future petroleum revenues underscores the importance of clear and public operational investment guidelines for the FMP. ### Key recommendations (10) - Consolidate the general government and the public sector in fiscal reports to enhance usefulness for fiscal analysis and policy making (Recommendation 1.1). - Improve coverage of stocks and flows in fiscal reports by including missing assets, liabilities, and fiscal flows (Recommendation 1.2). - Start publishing fiscal statistics by economic and functional classifications compliant with international standards (Recommendation 1.3). - Strengthen the medium-term fiscal framework and the medium-term budget framework to enhance the government’s ability to plan public expenditure over the medium term (Recommendation 2.1). - Strengthen mechanisms for independent validation of the government’s macroeconomic and fiscal forecasts, and compliance with fiscal targets/rules (Recommendation 2.2). - Strengthen macroeconomic risks analysis with alternative macroeconomic scenarios and other specific risks to better inform fiscal policy making (Recommendation 3.1). - Prepare and publish a summary report quantifying and disclosing the main specific fiscal risks, and a strategy to manage them (Recommendation 3.2). - Establish a comprehensive framework for the financial governance and oversight of non-financial public corporations (Recommendation 3.3). - Strengthen oversight and reporting on activities under PEMEX’s entitlements (Recommendation 4.1). - Publish the benchmark portfolio that operationalizes the FMP’s investment guidelines after issuance by the FMP’s Technical Committee, and publish the risk management policy to limit deviations from the benchmarks (Recommendation 4.2). ### Additional material noted in the report - The remainder of the report provides detailed evaluation against the FTC standards in four chapters: fiscal reporting; fiscal forecasting and budgeting; disclosure and management of fiscal risks; and natural resource revenue management (using a draft Fourth Pillar of the FTC). - Table 0.1 summarizes Mexico’s performance against the FTC. - Table 0.2 presents a preliminary and partial estimate of the Mexico public sector financial overview for FY 2016. *Source: EXECUTIVE SUMMARY (cr18289) — IMF Fiscal Transparency Evaluation of Mexico.* ### 3. In 2016, the public sector in Mexico comprised 2,693 institutional units of various legal ### 3. In 2016, the public sector in Mexico comprised 2,693 institutional units of various legal ### Public sector composition (2016) - Total number of institutional units: 2,693. - Total expenditure: about 33 percent of GDP. - Main subsectors and entities: - Budgetary central government (BCG): 32 executive, legislative and judicial bodies (including 18 secretariats, the agrarian court, 2 commissions, 2 councils and the presidential office), 7 autonomous agencies and INEGI (bureau of statistics). - Extra-budgetary central government (EBU): 119 entities (33 institutes, 22 research centers, 10 commissions, 9 “organic” trust funds, 9 hospitals, 6 national councils, 6 regional schools). - Social security sector: 3 social security institutions — IMSS, ISSSTE, ISSFAM. - State and local governments: legislative, judiciary and executive bodies of 32 states (including Ciudad de Mexico) and 2,457 municipalities; 65 trust funds at state level. - Public corporations: 19 financial and 49 non-financial corporations, including 6 development banks, 2 insurance companies, PEMEX, CFE, 17 ports administration companies, and the Mexican Central Bank (Banxico). ### Fiscal reporting coverage and indicators - Traditional reporting: - Fiscal reports traditionally cover only entities fully included in the federal budget: BCG entities, two social security funds (IMSS and ISSSTE), and two major non-financial public corporations (PEMEX and CFE). - Monthly and quarterly reports focus on budget execution and financing. - The budget fiscal balance (“traditional balance”) remains the main fiscal indicator. - Public Sector Borrowing Requirements (PSBR / RFSP): - Introduced by the Fiscal Responsibility Law (LFPRH) in 2006. - Expands federal budget coverage to include EBUs (including non-organic funds: FEIP, FEIEF, FIES, FMP, Fonadin, FEIPEMEX, FARP), development banks, the IPAB, PIDIREGAS and debt support program. - PSBR in fiscal reports is derived from the traditional balance by adding these units and applying accounting adjustments. - SHCP publishes online PSBR tables with revenue/expenditure breakdowns by high-level GFSM 2014 codes on the Estadísticas Oportunas de Finanzas Públicas platform. - PSBR tables are displayed by sector using international presentation and include a consolidated central government table, but detailed PSBR sectoral tables have not been fully integrated into the in-year fiscal reports. - Annual financial statements (Cuenta Pública): - Most comprehensive fiscal report but do not consolidate subsectors; presented in eight volumes: (i) summary fiscal performance; (ii) federal government financial statements (consolidates volumes (iii),(iv),(v)); (iii) executive branch; (iv) legislative branch; (v) judicial branch; (vi) autonomous agencies; (vii) parastatal sector (EBUs, social security, financial and non-financial public corporations); (viii) PEMEX and CFE. - No consolidation (nor aggregation) of subsectors except volume (ii) consolidating volumes (iii),(iv),(v). ### Coverage gaps and reporting limitations - Major omissions from fiscal reports and financial statements: - Subnational governments, the Central Bank, and non-organic funds (FEIP, FEIEF, FIES, FMP, Fonadin, FEIPEMEX, FARP, among others). - Degree of coverage: - In 2016, the financial statements covered 89 percent of gross public sector expenditures, but a major part consisted of transfers to subnational governments. - Subnational governments account for around 35 percent of the net public sector expenditure, but are not consolidated in any fiscal report. - Transfers to subnational governments represented around 40 percent of the federal budgetary expenditures in 2016 (MXN 1.7 trillion); final utilization of these resources is partially disclosed due to absence of consolidated subnational fiscal reporting. - Only about 20.2 percent of subnational governments’ resources are reported in the quarterly fiscal reports. - National vs. international subsector classification: - National classification organizes the public sector into: (i) federal budgetary public sector (BCG units, social security funds, PEMEX, CFE); and (ii) parastatal sector (EBUs, “organic” trust funds, financial and non-financial corporations except PEMEX and CFE). - Stabilization funds, subnational governments and the Central Bank are not taken into account in the national subsectoring. - This national presentation differs from GFSM 2014 international standards and makes it difficult to assess public sector fiscal stance and inter-subsector interactions. - SHCP is applying a second classification layer in volume (vii) of financial statements to sectorize parastatals per international standards and intends to gradually introduce this presentation into in-year fiscal reports. ### Key fiscal figures and sectoral breakdown (Table-format figures preserved) - Aggregate and subsectoral figures (in percent of GDP, unless otherwise stated): - Public Sector — Number of entities: 2,693; Revenue: 28.8; Expenditure: 32.9; Balance: -4.0; Intra-PS expenditure: 0.0; Net expenditure: 32.9; percent net expenditure: 100.0 - General government — Number of entities: 2,624; Revenue: 23.7; Expenditure: 26.4; Balance: -2.7; Intra-PS expenditure: 1.8; Net expenditure: 24.6; percent net expenditure: 75.0 - Central government — Number of entities: 160; Revenue: 20.5; Expenditure: 23.6; Balance: -3.0; Intra-PS expenditure: 10.6; Net expenditure: 12.9; percent net expenditure: 39.3 - Budgetary central government — Number of entities: 38; Revenue: 17.7; Expenditure: 20.6; Balance: -2.8; Intra-PS expenditure: 13.5; Net expenditure: 7.1; percent net expenditure: 21.5 - Extrabudgetary units and funds — Number of entities: 119; Revenue: 1.3; Expenditure: 1.7; Balance: -0.4; Intra-PS expenditure: 0.0; Net expenditure: 1.7; percent net expenditure: 5.1 - Social Security — Number of entities: 3; Revenue: 4.4; Expenditure: 4.2; Balance: 0.2; Intra-PS expenditure: 0.0; Net expenditure: 4.2; percent net expenditure: 12.7 - State governments — Number of entities: 32; Revenue: 10.1; Expenditure: 9.9; Balance: 0.2; Intra-PS expenditure: 0.0; Net expenditure: 9.9; percent net expenditure: 30.0 - Local governments — Number of entities: 2,432; Revenue: 1.9; Expenditure: 1.9; Balance: 0.1; Intra-PS expenditure: 0.0; Net expenditure: 1.9; percent net expenditure: 5.6 - Central Bank — Number of entities: 1; Revenue: 0.2; Expenditure: 0.5; Balance: -0.2; Intra-PS expenditure: 0.0; Net expenditure: 0.5; percent net expenditure: 1.4 - Nonfinancial public corporations — Number of entities: 49; Revenue: 9.9; Expenditure: 11.2; Balance: -1.2; Intra-PS expenditure: 3.6; Net expenditure: 7.6; percent net expenditure: 23.0 - Other financial public corporations — Number of entities: 19; Revenue: 1.5; Expenditure: 1.4; Balance: 0.1; Intra-PS expenditure: 1.2; Net expenditure: 0.2; percent net expenditure: 0.6 ### Subnational finances and transfers - Subnational financing sources: federal transfers via participaciones and aportaciones, voluntary transfers, co-financed projects (convenios). - Participaciones: grants to states and municipalities based on a fixed share (around 20%) of federal tax revenues. - Aportaciones: earmarked transfers for education, health, social assistance and infrastructure. - Article 85 of the Federal Budget and Fiscal Responsibility Law mandates states and municipalities to submit to SHCP quarterly information on performance of federal aportaciones; this is incorporated as Annex XXIII to the quarterly fiscal report and includes an online database with financial execution by fund, project management, and program performance indicators, but lacks resource utilization by economic categories. ### The Mexican pension system (Box 1.1) - System characteristics: - Fragmented, multiple pension schemes for private sector, civil servants, military, and special regimes. - Two main schemes: IMSS and ISSSTE; several special regimes (PEMEX, CFE, IMSS-patrón, ISSFAM, Development Banks, other agencies, universities, subnational governments, closed regimes LyFC, Ferronales). - IMSS (private sector): - Reformed in 1997 to a defined-contribution regime with individual retirement accounts. - Contribution rates: worker 1.125% of the quotation base wage; employer 5.150%; government 0.225% (total contribution reaches 6.5%) plus 5% for housing and a social fee depending on salary for workers below 15 times the monthly UMA (monthly UMA in 2016 was MXN 2,220.42). - Individuals who contributed before 1997 were grandfathered and can choose the old PAYGO pension if higher; choosing old system requires returning part of the individual account balance at retirement. - ISSSTE (public sector employees): - Reformed in 2007 to defined-contribution regime. - Contribution rates: worker 6.125% of quotation wage; government contributions 5.175% for retirement (total contribution 11.3%) plus 5% for housing and 5.5% of a minimum wage as a social fee regardless of salary; voluntary savings "Ahorro solidario" available. - Migrants from old regime received recognition bonds; those who stayed in old regime receive PAYGO pensions with parametric eligibility changes. - Other regimes: - PEMEX and CFE: PAYGO schemes with more generous benefits; subject to changes toward defined-contribution and parametric reforms in 2015; government issued pension bonds to these companies equal to the net present value of future pension savings. - ISSFAM: covers military personnel; pension payments mainly funded by the federal budget. - Other schemes: Development Banks, other agencies, universities, IMSS-patrón; closed regimes (LyFC, Ferronales); generally more generous and mainly budget-funded. - Subnational pension schemes funded by state and local budgets. - Actuarial pension liabilities (2016): - Actuarial pension liability total: MXN 9,166 (trillion) — 46.9 percent of GDP. - ISSSTE - PAYGO: 5,409 — 27.7 - PEMEX: 1,220 — 6.2 - CFE: 499 — 2.6 - IMSS-patrón: 1,722 — 8.8 - Other: 316 — 1.6 - Contingency: nana - IMSS - PAYGO: nana - TOTAL: 9,166 — 46.9 - GFSM 2014 statistical treatment implications: - Defined-benefit vs. defined-contribution, social security vs. employment-related classification determine whether liabilities are recorded. - For defined-benefit schemes: if beneficiary is the general population (social security), no liabilities recorded but net implicit obligations for future social security benefits should be presented as a memorandum item; if employment-related, they are recognized as liabilities. - Under these criteria: actuarial liabilities of ISSSTE (old PAYGO scheme) and special regimes in Mexico would be recognized as firm liabilities; the old PAYGO IMSS scheme would be considered contingent liabilities. *Source: IMF staff estimates and published Mexican fiscal documents as presented in the chapter.* ### 10. The Cuenta Pública and the quarterly fiscal reports cover cash and debt positions; the ### 10. The Cuenta Pública and the quarterly fiscal reports cover cash and debt positions; the information provided on other financial assets and liabilities is not comprehensive. ### Major coverage gaps in fiscal financial statements - Subsoil assets are not reported: PEMEX estimates (covering about 90-95 percent of Mexico's proved reserves) reached 11 percent of GDP for end-2016. - Nonfinancial assets not properly recorded: - Valuation of fixed assets (property, plant, equipment) and land is based on historic cost rather than market values. - CONAC has established that nonfinancial assets held by the Executive Branch are not subject to depreciation, which tends to overvalue such assets. - ASF found unverified stocks of around 2.5 percent of GDP in highways infrastructure in the 2016 auditing cycle. - The General Law on National Assets classifies some non-financial assets as “public domain” (roads, bridges, highways, ports), and therefore not recorded in financial statements per the General Law on Governmental Accounting; 2016 financial statements include public domain assets, but full adoption by UCP will materially affect the balance sheet. - Employment-related pension liabilities are partially reported: total public sector pension liability amounted to 47 percent of GDP, of which only 8.7 percent of GDP is reported in the statements. - NIFD-3 (Norma de Información Financiera D-3) seems broadly aligned to IPSAS but is not reflected in Cuenta Pública. - IMSS and ISSSTE presented two sets of statements for 2016 (one with NIFD-3 pension liability and one without); the latter was used for Cuenta Pública. - Liabilities for special pension schemes (armed forces, courts, development banks) are not reported in Cuenta Pública, except for PEMEX and CFE which have incorporated their pension liabilities. - Financial liabilities related to PPPs are not reported: current portfolio of 22 projects accounts for liabilities of around 0.2 percent of GDP; no reporting in financial statements and fiscal reports. - Debt securities are mainly registered at face value rather than market value or nominal value: the accounting treatment of long-term T-bonds at face value results in a recorded discount asset that accounted for 6 percent of GDP by end-2016. - 87% of total stock of debt securities are long-term T-bonds registered at face-value. - Treasury securities used by Banxico for liquidity management are only partially reported: about 25 percent of GDP (4.9 percent of GDP placed in the market through Banxico plus an additional 20 percent of GDP held by the bank for open market operations) are treated inconsistently across statistics and Cuenta Pública. - Assets and liabilities at the subnational level are not reported: estimated subnational assets around 7.8 percent of GDP (mainly non-financial assets) and total liabilities of states and municipalities amounted to 3.6 percent of GDP (three-fourths of it being credit loans). ### Reported balance sheet and adjusted estimates (2016) - Published Cuenta Pública (Tomo II) reported a negative net worth of 21 percent of GDP by December 2016; missing items would have improved the financial position by 7.8 percent of GDP. - Reported assets (Cuenta Pública): 50.4 percent of GDP - Fixed assets (buildings, machinery and infrastructure): 6.9 percent of GDP - Deposits in the Treasury restricted account held in Banxico (monetary regulatory framework): 25.3 percent of GDP - Equity in parastatals and public corporations: 7.0 percent of GDP - Equity in non-organic trust funds: 1.7 percent of GDP - Accounting asset related to discount on issuance of long-term T-bond: 6.3 percent of GDP - Reported liabilities: 71.2 percent of GDP - T-bonds (at face value): 65.5 percent of GDP (including 25.3 percent of GDP on the monetary regulatory framework) - Loans: 4.4 percent of GDP - Accounts payable: 1.2 percent of GDP - Staff adjustments in line with international standards would increase net worth by 7.8 percent of GDP (as shown in Table 1.3). ### Consolidated public sector position and cross-country context - Consolidated view: net worth reaches a negative 50 percent of GDP. - Total public sector estimated liabilities: about 123.9 percent of GDP - Debt securities: 52.3 percent of GDP (including T-bills, T-bonds and treasury securities sold by Banxico) - Pension liabilities: 46.9 percent of GDP - Loans: 12.7 percent of GDP - Estimated assets: 73.9 percent of GDP - Fixed assets: 39.9 percent of GDP - Petroleum reserves: 11.3 percent of GDP - Financial assets (deposits, international reserves and financial investments): 34.0 percent of GDP ### Accounting basis, statistical treatments, and omitted flows - Fiscal reports used for policy discussions are compiled on a cash basis (revenues recorded when cash collected; expenditure when payment made). Budget execution records a modified cash basis (devengado) but that is not used to compile fiscal balance indicators. - Some entities produce accrual information (IMSS, ISSSTE, PEMEX, CFE) but only cash flows are submitted to SHCP for monthly and quarterly fiscal reports. - Statistical treatment of Banxico capital payments (ROBM) is not in line with international standards: - Recent transfers from Banxico to SHCP treated as dividends in fiscal statistics, positively affecting fiscal balances, despite these transfers mainly reflecting unrealized profits from MXN depreciation on international reserves. - Under GFSM 2014, unrealized gains/losses from exchange rate valuation associated with international reserves are other economic flows and should not affect fiscal balance. - FEIP oil-hedging transactions require revision: - FEIP is outside the federal budget; the fund acquires financial instruments (mainly option contracts) for hedging oil-price risks. - GFSM 2014 recommends such transactions be treated below-the-line (net acquisition of financial assets), but current practice records outflows below-the-line and inflows above-the-line, creating an asymmetric treatment that positively distorts the PSBR. - Short-run pragmatic alternative suggested: record payments from the fund as expenses above-the-line. - Annual financial statements present some accrual flows, but significant accrued transactions are omitted: - Major omission: unreported annual net accrual of employment-related pension liabilities estimated at 2.3 percent of GDP in 2016 for all special pension schemes and ISSSTE. - Depreciation of fixed assets held by the Executive Branch is not recorded (national regulation establishes depreciation does not apply to Executive Branch fixed assets). - Lack of accrual recording of interest on discounted long-term T-bonds. - Flows related to PPP contracts are not recorded because IPSAS 32 has not yet been adopted. ### Accounting standards and implementation status - IPSAS have not yet been implemented; CONAC’s Government Accounting Conceptual Framework establishes national regulations take precedence over international standards. - Over 70 regulations issued by CONAC exist; some IPSAS elements taken as references but not adopted. - Federal and local governments’ initiative to enhance PPP accounting in line with IPSAS 32 is a first step toward gradual IPSAS implementation. ### Impact of cash-to-accrual and coverage adjustments on fiscal balance (2016) - Cash-to-accrual and coverage adjustments would increase the Mexican public sector deficit by 3.5 percent of GDP in 2016, mainly due to ROBM and FEIP oil hedging program adjustments and accrual of pension entitlements. - Adjusting the statistical treatment of ROBM and FEIP oil hedging program would increase the cash deficit to 4.1 percent of GDP, 1.3 percent higher than currently reported in fiscal reports. - Including accrued expenses related to pension entitlements and PPP contracts would raise public sector net borrowing to 6.3 percent of GDP. ### Transparency and reconciliation challenges - Cash transactions within public sector entities are difficult to follow in reports due to complex transfers, multiple-tier earmarking mechanisms, and multiplicity of trust funds. - Transfers are reported in several tables across multiple reports with different presentation formats and coverage; reconciliation is not easy and there is no guidance on interpretation. ### Policy implications and priorities (implied by coverage issues) - Adopt and implement IPSAS elements progressively, including IPSAS 32 for PPPs. - Incorporate NIFD-3 practices into Cuenta Pública to fully reflect employment-related pension liabilities. - Record subsoil/petroleum assets and apply market valuation where material differences exist. - Introduce depreciation for Executive Branch nonfinancial assets or disclose market values where historic cost is material. - Align statistical treatment of Banxico transfers (ROBM) with GFSM 2014 (treat unrealized gains/losses as other economic flows). - Implement symmetric statistical treatment for FEIP oil-hedging transactions (consider recording fund payments as expenses above-the-line as an immediate pragmatic alternative). - Report and consolidate subnational assets and liabilities in fiscal reports. - Enhance transparency and standardize reporting formats to enable reconciliation of intra-public-sector transfers and trust fund transactions. *Source: cr18289 - 10. The Cuenta Pública and the quarterly fiscal reports cover cash and debt positions; the* ### references in one CONAC accounting agreement. IFAC states in its website that Mexico has not adopted IPSAS so far. ### cr18289 - references in one CONAC accounting agreement. IFAC states in its website that Mexico has not adopted IPSAS so far. ### Tax expenditures: coverage, level, composition, and transparency - Mexico has published an annual report on estimated revenue loss from tax expenditures since 2002; the report is delivered to Congress by June 30 each year and is published on the SHCP’s website. - The report: - Covers the current year and the coming fiscal year. - Defines tax expenditures and explains the methodology used for calculating revenue losses. - Breaks down information by category of tax (e.g., corporate and personal income tax, VAT), by expenditure (e.g., deductions, exemptions, deferrals), and by economic sector. - Key figures and composition: - Total tax expenditure in 2018 is estimated to be around 3.5 percent of GDP. - Tax expenditures as a share of total tax revenues: 26.6 percent. - Almost 45 percent of all tax expenditures correspond roughly to 1.5 percent of GDP and relate to VAT (largest are revenue losses due to reduced rates). - A similar share relates to corporate and personal income taxation, including employment subsidies and exemptions of personal income tax. - Recent trend and driver: - After the income tax reform in 2014, overall tax expenditures fell, particularly for corporations, but increased slightly in 2017 and 2018, largely related to the implementation of the energy reform package that provided fiscal stimulus during the transition to market-based fuel rates. - Transparency and budgeting linkage: - The budget proposal is submitted later than the report on tax expenditures; the link between the tax-expenditure report and the budget decision-making is weak in practice. - The annual revenue law contains only a summary of tax expenditures without a table describing main tax expenditures and related revenue losses. - Recommendation: Provide full information on all tax expenditures in the budget documents to improve transparency and prioritization of public resources. ### Frequency and timeliness of fiscal reporting - Monthly and quarterly publication practices: - SHCP publishes fiscal reports on a monthly basis with a 30-day lag. - The quarterly fiscal report is available within a month from the end of the quarter (published 30 days after the end of the reference quarter). - The monthly fiscal bulletin and monthly fiscal report (cash-based fiscal statistics: traditional balance, RFPS, financing and debt position) are disseminated monthly within 30 days of the end of each month. - Monthly report on grants to subnational governments is published with a 15-day lag. - Constitutional and statutory deadlines: - The Constitution (article 74) mandates publication of final accounts (Cuenta Pública) by end-April and audited statements by end-October. - SHCP has consistently met the dates; AFS has produced its auditing report to the chamber of deputies within the legal 8 months after the year end. - The constitution allows a maximum extension of 30 additional days on both deadlines. - Ratings in the assessment: - Frequency of in-year reports: Advanced. - Timeliness of annual financial statements: Advanced. ### Quality and classification of fiscal statistics - Classification and alignment: - Fiscal reports include classification by administrative, economic, functional, and program categories. - Economic classification is broadly aligned with GFSM 1986 and is detailed; functional classification largely follows UN COFOG but adjusted to Mexico’s sector structure. - Programmatic structure is submitted to the Chamber of Deputies by June 30 each year. - Classification and reporting structure is harmonized across federal, state, and local levels. - Compliance with international standards and planned changes: - Economic and functional classifications have yet to comply with international standards; SHCP is preparing changes to achieve compliance. - SHCP developed bridging tables to produce reports by economic classification consistent with GFSM standards; these were submitted to the IMF in early 2018 but had not been published at the time of the mission. - Publication of these bridging tables would improve the rating; if published, the rating for the Principle would increase to Basic, and with a published bridging table to produce COFOG-compliant data the rating would move to Advanced. - Specific valuation and consistency issues: - Debt tables register gross debt, net debt, change in net debt, stock of T-bonds, and flows of issuance at face value; Cetes and Udibonos Segregados are exceptions and represented only 13 percent of the debt stock in treasury securities by end-2016. - As a result, financing data in the traditional balance table are not comparable with financing figures in the reconciliation table (valuation method inconsistency). - Recommendation: Change valuation method of T-bonds to nominal value to ensure the fiscal balance performance indicator properly assesses debt dynamics. ### Internal consistency, statistical discrepancies, and historical revisions - Internal consistency: - Fiscal reports include two out of three reconciliations prescribed by the FT code; the reconciliation between financing and change in debt position is not explicitly presented but can be derived from additional tables on change in net debt. - Statistical discrepancy figures: - Discrepancy between above-the-line and below-the-line deficit for the federal government (traditional balance) was 0.02 percent of GDP in 2015 and technically zero in 2016. - For the broader PSBR indicator (federal public sector), average discrepancy was 0.27 percent of GDP over 2008-2017, surpassing the threshold of 0.1 percent of GDP in 2009 and 2017. - The SHCP’s Estadísticas Oportunas database provides the discrepancy series for PSBR. - Historical revisions: - Revisions to fiscal aggregates are not disclosed in fiscal reports; provisional statistics become final upon audited financial statements (18 months later). - SHCP updates its online database retroactively when sources/methods change, but the public is not informed via comparisons, explanations, or bridging tables. - Over the last few years, annual revisions to the fiscal balance were less than 0.1 percent of GDP. - Recommendation: Publish analyses and a short section on historical revisions in quarterly fiscal reports. ### Integrity, external audit, and statistical standards migration - Institutional integrity and SDDS: - Fiscal statistics are produced and disseminated by SHCP in line with IMF SDDS practices; Mexico subscribed to SDDS in 1996 and met all SDDS requirements in 2000. - Legal mandate: Articles 106 to 109 of the LFPRH define SHCP’s scope to submit fiscal information to Congress and the public; General Directorate of Statistics consolidates data from various units. - Migration to international standards: - SHCP submitted fiscal data to the IMF’s GFS Yearbook using the GFSM 2014 reporting format for the first time in early 2018. - Recommendation: Set up a migration plan to gradually adopt GFSM 2014 and IPSAS (including accrual accounting practices) to allow more comprehensive fiscal analysis and evaluation of fiscal policies. - Note: IFAC states (per the content unit title) that Mexico has not adopted IPSAS so far. - External audit and ASF findings: - Auditoria Superior de la Federación (ASF) is the supreme audit institution; mandate regulated by articles 74 and 79 of the constitution; Auditor General appointed by the legislative branch. - ASF audits financial statements in accordance with ISSAI and reports to a surveillance commission of the chamber of deputies. - ASF has conducted financial audits of the Cuenta Pública as a whole since 2012. - Findings and enforcement: - ASF issued 4 disclaimers and 1 adverse opinion in 2012-2016. - Key concerns raised by ASF: - Limited accounting records for non-financial assets and corresponding depreciation, PPP arrangements, and contingent liabilities. - Financial statements not fully harmonized among public entities; inconsistencies in debtor-creditor records and non-compliance with reporting by several entities. - PPP-related liabilities are not disclosed. - Pension liabilities are not registered. - Limited findings on subnational governments as ASF began auditing them only in 2017; initial audits suggested reliability concerns and discrepancies between state-level reporting and INEGI data for 2016. - ASF has issued recommendations to strengthen measurement of fiscal position, fiscal revenues and expenditures, public sector financing, public spending, and public debt at subnational level. ### Selected numeric and table-derived highlights (preserve source precision) - Depreciation of fixed assets: 1.0 percent of GDP (affects operating balance, not net lending). - Traditional Balance (modified-cash, Quarterly Report): -2.5 - Coverage adjustments listed (examples): FONADIN -0.1; IPAB -0.02; Development Banks 0.1 - Methodological adjustments listed (examples): PIDIREGAS -0.1; Debtor support program 0.02; Other -0.1 - PSBR Balance (modified-cash, Quarterly Report): -2.8 - Cash adjustments listed (examples): ROBM -1.2; FEIP oil hedging program -0.09 - PSBR Balance (cash, adjusted): -4.1 - Cash-accrual adjustments (Cuenta Pública): Change in arrears (accounts payable) -0.02; Accrued interest on discounted T-bonds na - PSBR Balance (accrued, Quarterly Report): -4.1 - Coverage adjustments (later): Central Bank (Banxico) -0.2; State governments 0.2; Local governments 0.1 - Public Sector Net Lending/Borrowing: -4.0 - Additional accrual adjustments: Accrual of pension entitlements -2.3; PPP investment 0.00 - Augmented Public Sector Net Lending/Borrowing FTE: -6.3 *IMF staff report content (cr18289).* ### 40. Final accounts have a different classification framework, and there is no reconciliation ### 40. Final accounts have a different classification framework, and there is no reconciliation of main aggregates ### Differences between financial statements and budget execution - Financial statements are distinct in coverage, basis of recording, and classification of revenues and expenses from budget execution figures. - Accounting and budget execution figures differ, but notes to the statements and budget outturn documents provide inadequate information on reconciling those numbers. - The publication of fiscal data in line with the GFSM 2014 presentation should be accompanied by bridging tables to allow for reconciliation with the budget and traditional fiscal statistics. - SHCP prepared bridging tables to map traditional fiscal data to the GFSM 2014 economic categories and submitted converted data to the IMF’s statistics department in the beginning of 2018. - If this converted data is published, it should be accompanied by the corresponding bridging tables to ensure reconciliation of the new statistics with the previous ones; absence of published bridging tables would require an eventual reassessment of the rating (note: If the bridging tables are not published together with the statistics, the rating would move to Basic, since there would be a new set of statistics that are not reconciled with the budget outturn). ### Overall assessment — strengths and weaknesses (Conclusions) - Fiscal reporting meets good or advanced standards in several areas: - Fiscal statistics are disseminated on a monthly basis. - Final financial statements are released four months after the end of the referenced fiscal year. - SHCP’s General Directorate of Statistics consolidates information from various data-producing units to compile final statistics for dissemination. - Fiscal statistics are comparable with fiscal forecasts and budget plans since built on budget execution data. - Mexico is SDDS compliant since 2000. - Tax expenditures are fully disclosed on an annual basis. - Key weaknesses and gaps: - Subnational sector is not covered by any fiscal report, despite states and municipalities representing 35 percent of the total public sector spending (net of transfers). - Relevant assets, liabilities and transactions (flows) are omitted or misreported in financial statements and fiscal statistics. - Financial statements are not consolidated, undermining their usefulness for comprehensive analysis of the public sector financial position. - Lack of compliance with international standards on economic and functional classification of revenues and expenditures limits transparency and comparability. ### Priority recommendations for improving fiscal reporting (FTE highlights) - Recommendation 1.1: Consolidate the general government and the public sector in the fiscal reports in accordance with international standards. - Expand coverage and improve consolidation practices to allow a broader view of public finances and enhance the usefulness of reports for fiscal analysis and policy decision-making. - Priority actions: - Introduce fiscal data of subnational governments in the Quarterly Fiscal Report (initially on annual basis in the end-year report) and consolidate these entities in the PSBR and HBPSBR fiscal indicators. States and municipalities are responsible for the final allocation of around 40 percent of the federal budget expenditures; disclosing their budget execution will be a major improvement. - SHCP should develop a web-based software system for submission of fiscal data by states and municipalities. Once operational, fiscal statistics for the consolidated general government and public sector can be disseminated on a quarterly basis. - Implement consolidation practices in Cuenta Pública: consolidate volumes (Tomos) II, VII and VIII in a new volume to present statements for the consolidated federal public sector; gradually include accounts of states, municipalities and Banxico to consolidate the entire public sector. This would improve usefulness of statements for overseeing the evolution of the overall financial position, including asset/liability management and mitigation of fiscal risks. - Recommendation 1.2: Improve the coverage of stocks and flows in fiscal reports by including missing assets, liabilities and fiscal flows to provide an accurate view of Mexico’s financial position. - Cuenta Pública should: - include main missing assets and liabilities highlighted in the report such as the FMP, oil reserves at present value, the employment-related pension liabilities (IMSS-patrón, ISSSTE, ISSFAM, PEMEX, CFE, courts and development banks), PPP liabilities, and assets and liabilities at the subnational level (including pension liabilities); - improve the valuation of fixed assets, in particular highways infrastructure, and account the long term T-bonds (Bondes “D”, Bonos de Desarrollo, Udibonos, Udibonos Segregados) at nominal value; - record flows of net accrual of employment–related pension liabilities, accrual of interest on discounted long term T-bonds and accrued expenses under PPP arrangements. - Quarterly Fiscal Report should: - include the stock of T-bonds issued to Banxico in debt statistics (gross debt, net debt, HBPSBR and PFN); - apply nominal value as valuation method of T-bonds; - correct the asymmetric treatment of FEIP’s oil hedging program transactions and adjust the PSBR calculation; - include the accrual of interest on discounted T-bonds; - include expenditures and debt position of the subnational governments (at least on annual basis – end year report). - Recommendation 1.3: Start publishing fiscal statistics by economic and functional classifications compliant with international standards. - Short-term actions: - SHCP should include more detailed statistical tables for reporting on the PSBR aligned with the GFSM 2014 economic classification in the budget documents and quarterly fiscal report. While such tables are available on SHCP’s website, they are not published in any regular reports. - Publishing GFSM 2014 compliant reporting (including the bridging tables SHCP prepared for the IMF) would enhance understanding of underlying pressures on the budget and strengthen usefulness and credibility of fiscal reports. - Medium-term actions: - SHCP could develop a bridging table to produce COFOG-compliant reports and publish these reports. - Other recommendation: - Continue with the process of the gradual implementation of IPSAS in Mexico to improve accounting practices (decision to implement IPSAS needs to be approved by CONAC). ### Key statistics and quantified impacts (from assessment and Table 1.5) - Subnational governments: - States and municipalities represent 35 percent of the total public sector spending (net of transfers). - Total expenditure at subnational level amounted for around 11% of GDP in 2016 (35% of the total public sector). - Missing items negatively impact net worth by around 23% of GDP: - oil reserves: 11% of GDP; - pension liabilities: 38% of GDP; - assets of subnational govt: 7.8%; - liabilities of subnational govt: 3.6%; - PPP liabilities: 0.2% of GDP. - Non-reported cash and accrued expenditures deteriorate fiscal balance by 3.5% of GDP: - ROBM and FEIP oil hedging program transactions: 1.3% of GDP; - net accrual of employment–related pension liabilities: 2.3% of GDP; - accumulation of arrears: 0.02%; - accrual of PPP liabilities: 0. - Tax expenditures: - Overall level of tax expenditures is at a low level of 3.5% of GDP in 2018. - Frequency and timeliness: - In-year fiscal reports are published on a monthly basis, within a month. - Final accounts are published by end-April and audited statements by end-October (as mandated by the Constitution). - Audit record: - ASF has conducted financial audits on annual accounts since 2012, issuing 4 disclaimers and 1 adverse (2013) opinion in the period 2012-2016. - Extra-budgetary units (EBUs) and trust funds: - Number of EBUs = 119. - Spending by EBUs as a ratio of total Federal Budget expenditure: 2015 = 5.8; 2016 = 6.2. - Own-revenues of EBUs as a ratio of total Federal Budget revenues: 2015 = 1.8; 2016 = 1.7. - Budget transfers to EBUs as a ratio of EBUs’ total revenues: 2015 = 67.0; 2016 = 66.2. - More than 246 federal trust funds make transactions largely outside the budget; net worth of these entities (including those belonging to sub-national governments) is estimated at about 2.7 percent of GDP. *Source: cr18289 - 40. Final accounts have a different classification framework, and there is no reconciliation* ### 49. Figure 2.1 illustrates the more relevant flows between the federal budget and other ### cr18289 - 49. Figure 2.1 illustrates the more relevant flows between the federal budget and other ### Relationship between the federal budget and the wider public sector (2016) - Transfers to subnational governments amounted to MXN 1,724 billion, mainly driven by revenue earmarking mechanisms. - IMSS and ISSSTE received MXN 491 billion to finance ordinary pension payments. - PEMEX received transfers of MXN 184 billion as a once-for-all compensation for the pension reform implemented in 2015. - CFE received transfers of MXN 161 billion as a once-for-all compensation for the pension reform implemented in 2015, and MXN 30 billion in subsidies for electricity prices. - Decentralized agencies (extra-budgetary entities, commissions, and hospitals, among others) received MNX 199 billion to finance operations beyond their own revenue. - FMP (Fondo Mexicano de Petroleo) collected MNX 380 billion from the oil sector in 2016 and transferred it to the budget; part was redirected to states and municipalities through the FEIP and FEIEF trust funds. - Figure 2.1 aggregates other flows and entities including: Banxico, FEIP, FEIEF, FIES, Subnational funds, Federal Budget, Parastatals, PEMEX, Public Corp., Nonorganic trust funds, and other public sector entities as shown in the diagram (values in the figure include: 2.7 bn; 3.1 bn; 667.7 bn; 1,050.9 bn; 239.1 bn; 490.7 bn; 307.9 bn; 308.0 bn; 70.0 bn; 191.1 bn; 199.0 bn; 160.7 bn). ### Macroeconomic forecasts: processes and accuracy - Forecasting documents - “Pre-Criteria” report (April): covers the previous, current and next fiscal year; includes no medium-term projections; provides overview of external environment and assumptions for GDP, inflation, oil price, interest rates, current account; discusses drivers of GDP components, fiscal and monetary policy developments, and government financing needs; includes projections of revenues, expenditures, planned borrowing and debt; submitted to Congress by April 1. - General Economic Policy Criteria (GEPC) report (September): provides a medium-term forecast of key macroeconomic variables and a wider review of economic and fiscal developments; part of budget package presented to Congress by September 8; provides updated projections for the current and next fiscal year and forecasts for the following five years (medium-term forecasts less detailed than next-year forecasts). - Forecast accuracy and deviations - Real GDP forecast one year ahead: average absolute deviation over last 7 years was 1.2 percentage points of GDP; yearly deviations shown: 2010: -2.1; 2011: -0.2; 2012: -0.5; 2013: 2.1; 2014: 1.2; 2015: 1.1; 2016: 1.0; average: 0.4; average of absolute values: 1.2. - Inflation (absolute deviations): 2010: -1.2; 2011: -0.8; 2012: -0.6; 2013: -1.0; 2014: -1.1; 2015: 0.9; 2016: -0.4; average: -0.6; average of absolute values: 0.8. - Narrative: nominal GDP forecasts relatively accurate except for a few outlier years; projections of real GDP growth and inflation show significant deviations from outturns. Since the economic downturn in 2013, successive forecasts predicted recoveries that did not materialize. - Recommendations noted in text to enhance credibility: take more account of independent forecasts and analyze forecast deviations with reconciliation tables. ### Medium-Term Budget Framework (MTBF): status and gaps - Current status - Mexico prepares and publishes a medium-term fiscal framework (MTFF); development of a medium-term budget framework (MTBF) is rudimentary. - The GEPC report is presented with the budget and includes projections for the upcoming budget year and the medium term (example: 2019-2023). - The GEPC includes a table showing medium-term projections of expenditure by economic category but at a highly aggregated level; limited data on outturns for the two preceding fiscal years. - Identified gaps relative to advanced MTBF models (summary of Table 2.3) - Present in Mexico: 3 to 5-year medium-term fiscal framework; alignment of budget projections with government fiscal policy objectives and macroeconomic forecasts; fully integrated budget preparation process for capital and recurrent spending. - Lacking in Mexico compared to advanced frameworks: indicative expenditure ceilings for the out-years; spending estimates for out-years rolled over from one MTBF to the next; a single process for preparing MTBF and annual budget with fully integrated documentation; separation of spending baselines and new policy proposals; reliable forward estimates of spending in out-years; planning margins or planning reserves in allocating appropriations; carry forward of spending from one year to the next within well-defined limits. ### Investment projects and public investment - Budget documentation and project information - Annual budget proposal includes total cost of all multi-annual investment projects with: (i) estimate of total project costs updated annually; (ii) cumulative actual spending during construction; (iii) appropriation for the upcoming budget year; (iv) estimated remaining project costs after the budget year. - Operational and maintenance costs are not included in total investment cost estimates. - Cost-benefit or cost-effectiveness analyses (referred to as “socio-economic evaluations”) are required for all public investment projects and are made public before approval; Investment Unit in the SHCP validates project documentation and cost-benefit analyses and registers projects in the database; cost-benefit analysis for all projects—approved and in the pipeline—is published on the SHCP’s website. - Public investment levels - Public investment fell to 3.4 percent of GDP in 2015. - The overall level of public investment is projected to fall to 2.6 percent of GDP in 2018. - Procurement and competition - Legislation requires major projects to be tendered competitively; Ministry of Public Administration oversees public procurement. - Exceptions to public bidding exist below thresholds and under specified circumstances. - In 2017 the maximum threshold was 8,515,000 pesos, equivalent to US$ 450,000 approximately. - About 70 percent of the total amount contracted in 2016 and 2017 was through public tenders, while 30 percent were contracted by direct awards and/or restricted tenders. - Audits by the Auditoría Superior de la Federación (ASF) identified issues: some major projects contracted through exceptions; not all contracts registered in CompraNet; tenders split to avoid open procurement; inappropriate use of exemptions allowing restricted tenders or direct awards. - The ASF’s report on General Problems Regarding Public Works and Related Services 2011-2016 highlighted: incomplete planning of scope and profitability; inadequate or incomplete bidding rules; inadequate tenders or contract awards; insufficient technical personnel to develop and evaluate project proposals. ### Fiscal legislation and orderliness - The legal framework for budgeting and fiscal management is comprehensive and clear: - The Constitution includes several articles on public finance and the budget process (notably Articles 73 and 74) and defines roles of the executive and the Chamber of Deputies in approving the annual budget. - The Constitution is supplemented by laws and regulations including: Budget and Fiscal Responsibility Law (BFRL, 2006, revised 2015), General Accounting Law (2008), and laws on public debt management and public procurement. - The framework covers budgeting, fiscal transparency, fiscal reporting, and many aspects of fiscal risk management (including PPPs). *Source: cr18289 - 49. Figure 2.1 illustrates the more relevant flows between the federal budget and other (extracted from provided chapter content).* ### 60. The legal framework sets out inter alia a clear timetable for budget preparation and ### cr18289 - 60. The legal framework sets out inter alia a clear timetable for budget preparation and ### Legal framework, roles, and amendments - The legal framework: - Sets out a clear timetable for budget preparation and approval, regularly complied with in recent years (see Section 2.2.2). - Defines key content requirements of the budget, the role of the SHCP and the President, and the powers of the Chamber of Deputies to make amendments to the draft budget. - Powers and practical constraints of the Chamber of Deputies: - In law, the Chamber’s power to amend the budget is unlimited. - In practice, constraints include: - It cannot deny funding for expenditures the executive is legally or constitutionally compelled to make, such as federal transfers and entitlement spending. - It can increase expenditures only if additional sources of financing are identified. - It must comply with the fiscal targets and rules set out in the BFRL (see Section 2.3.1). - The Congress approves a revenue law prior to deliberations on the expenditure budget, and generally increases the (typically conservative) revenue estimates submitted by the government to create space for additional spending. - Recent amendment behavior and executive powers: - Amendments made by the Chamber of Deputies to the draft budget in recent years have averaged around 4-5 percent of the approved budget, and have been focused mainly on investment projects, and environmental and social programs. - The executive has full authority to make in-year adjustments to budget allocations without the approval of Congress (see Section 2.4.2). ### Timeliness of budget documents and calendar - Statutory deadlines: - The draft budget must be submitted to the Chamber of Deputies in early September, nearly four months before the start of the fiscal year, and must be approved and published by November 15. - These statutory deadlines have been complied with without exception in recent years. - Recent practice: - The budgets for 2016, 2017, and 2018 were approved by the Chamber between November 11 and November 13 in the previous year; and were published between November 27 and November 30. - The revenue budgets were submitted on September 8, and approved between October 26-29 in each of these years. - Budget calendar (selected entries from Table 2.5): - April 1: The executive submits the Pre-criteria report for the next fiscal year to the Congress. - June and July: Ministries start drafting their budget submissions. - July: The SHCP sets the aggregate ceiling for the budget and circulates the annual guidelines to ministries. - August 11-22: Ministries submit their budgets to the SHCP. - August 25: The SHCP integrates the draft budget. - September 8: The executive submits the draft budget to the Chamber of Deputies. - October 31: The Budget Committee receives comments from sectoral committees and submits the budget to the plenary. - November 15: The Chamber of Deputies approves the budget. - Second half of November: Publication of the budget. - January 1: The fiscal year begins. - Parliamentary process: - The main forum for budget analysis and debate is the all-party Budget Committee. - Sectoral committees review the budget and submit proposed amendments to the Budget Committee; the Budget Committee invites targeted sub-groups and takes evidence from academic institutions, business and civil society groups, representatives of line ministries and sub-national governments. - Consultations with the SHCP take place throughout the Chamber’s deliberations. - The Center for Public Finance Studies (CEFP), a technical advisory body attached to the Chamber of Deputies, reviews the draft budget (see Section 2.4.1). ### Fiscal policy objectives and rules (BFRL and subsequent amendments) - Framework characteristics: - The BFRL, enacted in 2006, introduced a zero-balance target on the fiscal deficit. - Modifications in 2014 supported the Fiscal Consolidation Plan targeting reduction of the budget balance to zero by 2017 (later amended to 2018). - Additional fiscal rules introduced in 2014: - Public sector borrowing requirement (PSBR) introduced as a target to limit pro-cyclicality of the deficit rule; no specific ceiling for the PSBR is specified. - A cap on the real rate of growth of structural current spending equal to potential output growth, currently estimated at 2.5 percent a year. - Up to 2 percent of capital investment by PEMEX, CFE, and other “high impact” economic and social investment may be discounted from the budget balance rule. - Starting in 2015, a new sovereign wealth fund, the Mexican Oil Fund, manages all hydrocarbon-related wealth. - Exceptional deviations and triggers: - Article 17 of the BFRL allows ex ante deviations from the fiscal balance rule under exceptional circumstances; regulations (Article 11) include five specific triggers related to exceptional economic changes, a revenue shock, or natural disasters. - The provisions have been triggered once, in 2014, following a sharp decline in the economy. - The five triggers include: - (i) An increase in interest rates which would raise the government’s debt servicing costs by more than 25 percent; - (ii) A natural disaster with a fiscal cost of more than 2 percent of programmable spending, after resources of the natural resources disaster fund have been exhausted; - (iii) Fiscal liabilities carried over from the previous fiscal year of more than 2 percent of programmable spending; - (iv) A fall in non-oil tax revenues of more than 2.5 percent; - (v) A fall in oil prices of more than 10 percent compared to the assumed price in the budget. - Reporting on compliance: - The SHCP’s General Economic Policy Criteria (GEPC) report, published in September when the budget is submitted, includes sections on prospects for public finances and compliance with the Fiscal Consolidation Plan and fiscal rules. - The Pre-Criteria Report published each April focuses on the forthcoming fiscal year. - Quarterly reports on budget execution include summarized assessments and note adjustments made in budget allocations. - The government publishes monthly and in SHCP’s quarterly reports information on 12 fiscal indicators that provide a broad picture of developments in public finance. - Recommendation noted: - The authorities could consider developing the Pre-Criteria Report into a medium-term fiscal strategy report issued early in the budget cycle, including a full discussion of fiscal policy objectives and targets in the medium-term context, assessment of compliance with fiscal rules, and fiscal sustainability. ### Performance information system - System features: - A comprehensive, fully-automated performance information system is established at the federal level, designed and managed by a dedicated unit in the SHCP with support from CONEVAL on social development programs. - Much of the information is published on the SHCP’s Transparency Portal. - Scope and indicators: - The budget’s programmatic structure currently includes 658 programs at the federal level. - About 100 of these programs relate to social development and are overseen by CONEVAL. - Nearly 5,000 performance indicators have been defined, of which 2,000 are “strategic” and outcome-based, while the remainder are output-based. - Targets are set for most indicators; some targets for a single year, others (including most strategic indicators) for several years. - Publication and monitoring: - Budget documentation includes an annex with details of performance indicators and targets for all 658 programs. - Summary information is included in SHCP’s quarterly reports on budget execution. - The SHCP has developed a “traffic lights” system to assess and monitor quality and relevance of indicators and progress toward targets. - Use in policymaking: - Performance information is used to a limited extent in the policy-making process. - A World Bank study concluded little evidence that performance information is directly linked to the budget cycle, and that use of performance information varies considerably across ministries. ### Public participation and transparency - Legal and institutional measures: - Several laws aimed at improving transparency and public participation in budget preparation have been adopted, increasing budgetary and fiscal information publication and establishing the Citizen’s Guide to the Budget and the Transparency Portal. - Citizen’s Guide to the Budget: - Published every year since 2010. - Provides accessible descriptions of recent fiscal performance and economic prospects; main budgetary revenues and expenditures; and impact of the budget on the typical citizen. - Separate issues cover the Federal Budget Proposal, the Annual Financial Statements and, from 2018, the SHCP’s quarterly reports. - Since 2018, the Guides are published only on the SHCP’s website. - SHCP and civil society developed a four-week online course on “How to Understand the Budget”. - Transparency Portal (Transparencia Presupuestaria): - Launched in July 2011. - Usage: 34,500 visits in its first year; nearly 900,000 visits in 2017. - The Performance Evaluation Unit in the SHCP plays a key role in increasing quantity and quality of budget information on the portal. - Public engagement practices and limitations: - Authorities provide relatively limited opportunities for public engagement in budget preparation and execution. - Some ministries solicit public opinions via print media or websites and conduct satisfaction surveys. - Civil society organizations participate in sector planning discussions; engagement varies by sector. - Congress seeks public views on annual budget proposals but there is no formal requirement for consultations; public hearings are often targeted at lobby groups and not open to the wider public. - Parliamentary plenary sessions are broadcast live on TV. - Participation metrics: - Mexico’s score of 44 out of 100 in the 2016 World Bank Voice and Accountability Index. - Mexico’s score of 39 out of 100 in the 2017 OBI index of public participation. ### Credibility and independent evaluation - SHCP reporting and external comparisons: - The SHCP’s two main reports on economic and fiscal policy (the “Pre-Criteria” report and the General Economic Policy Criteria (GEPC) report), published in April and September each year, provide little information on views of other forecasters or their projections. - In preparing macro-fiscal forecasts, the SHCP takes account of forecasts by the Bank of Mexico, Blue Chip, the IMF, and the World Bank, and consults rating agencies, research institutes, and major domestic banks; it also attends quarterly meetings of the Financial Stability Committee at the Bank of Mexico. - Reports published by the SHCP include virtually no information on these alternative assessments and forecasts. - Implication: - Publishing comparisons with alternative forecasts could improve accuracy of macroeconomic forecasts and reduce variability in short- and medium-term projections of revenue and expenditure (see Section 2.1.2). *Source: cr18289 (selected sections).* ### 76. The SHCP’s macroeconomic and fiscal forecasts are analyzed by the Center for Public ### cr18289 - 76. The SHCP’s macroeconomic and fiscal forecasts are analyzed by the Center for Public ### CEFP and independent scrutiny of forecasts - The SHCP’s macroeconomic and fiscal forecasts are analyzed by the Center for Public Finance Studies (CEFP), a technical support unit attached to the Chamber of Deputies. A similar unit—the Belasario Dominguez Institute (BDI)—provides support to the Senate. - The CEFP has a legal base in the FRBL, and is independent of the executive. - The Congress is responsible for the appointment of the Director of the CEFP and approving the Centre’s annual work program. - The Center analyzes the documents that are part of the executive’s annual budget proposal, as well as the quarterly reports and annual reports presented by the executive. - The Center prepares estimates of the budgetary impact of proposed legislation, and publishes studies on topics in public finance, a monthly news bulletin and its own Journal of Public Finance. - Notes on capacity and collaborations: - The Centre has about 40 professional staff, and sufficient analytical capacity to carry out its tasks. - It makes use of collaboration agreements with organizations such as the National Institute of Geography and Statistics (INEGI) and the National Council for the Evaluation of the Social Policy (CONEVAL). - It also has links with international organizations such as the OECD, the IDB, and the Economic Commission for Latin America and Caribbean (ECLAC). - Limitations: - While the CEFP and BDI analyze the executive’s economic and fiscal forecasts, they do not assess the credibility of these forecasts. - Nor do they review the government’s performance in achieving its fiscal objectives and targets, or its compliance with the fiscal rules set out in the FRBL. - Some of the CEFP’s reports include benchmarks that compare the macroeconomic forecasts prepared by various organizations, but only looking one year ahead. - Complementary oversight: - The federal audit agency (ASF) provides in its annual report a formal assessment of the government’s fiscal performance and its compliance with the fiscal targets/rules. ### Supplementary budget (in-year adjustments) — Basic - Legal framework allows the executive to spend more than the approved budget and then report to the Chamber of Deputies. Both the quarterly reports and the annual financial statements provide information on the main changes, but no ex-ante or ex-post approval by the legislature is required. - Relevant provisions of the FBRL: - Article 19 establishes that the SHCP can authorize additional expenditures if there is a surplus of revenues. The SHCP must inform the Chamber of Deputies in its quarterly reports and annual financial statements. - Article 19 provides how the excess revenues should be allocated. The provisions are fairly complex. - Article 21 notes the rules of budgetary discipline that the executive must apply when the revenues foreseen in the Revenue Law decrease. Although these provisions reduce the discretion of the executive to adjust spending, they do not indicate that the approval of the legislature is required to implement any cuts in expenditure. - Article 58 establishes that the executive may make budget adjustments provided they comply with the government’s policy objectives and programs. - Observed practice and magnitude: - The executive has considerable discretion to modify the expenditure allocations initially approved by the Chamber of Deputies. - Over the past decade, the executed budget has been on average 7 percent higher than the approved budget (Figure 2.10 and 2.11). - In all the last ten years the budget outturn has been above the approved budget. - In most years, this additional expenditure has been financed by higher than expected revenues (Figure 2.12). - Medium: Budgets of approximately 250 federal trust funds are excluded from budget documentation. - Medium: The average increase of budget expenditures is 7 percent over the last ten years. - The report also indicates approximately 246 federal trust funds when recommending publication of their financial transactions. ### Forecast reconciliation — Not met - The budget documentation does not provide any analysis of the differences between successive vintages of macroeconomic and fiscal forecasts. - The GEPC as well as the SHPC’s quarterly reports provide some assessment of why the forecasts of revenue, expenditure and financing included in the previous budgets have deviated from the outturns. However, this analysis: - Does not discuss whether the deviations are related to changes in fiscal policy, variations in macroeconomic conditions, policy changes, or other factors, even when in some cases the differences are considerable. - The report recommends that including a reconciliation table in budget documents, together with an analysis and explanation of deviations, would substantially increase the credibility of the forecasts that underpin the budget. - Suggested structure of a reconciliation table: - Begin with the previous year’s medium-term macroeconomic forecast; - Adjust for any accounting or classification changes; - Identify the impact of changes in the baseline macroeconomic forecast, due to variations in economic and demographic parameters; - Identify the fiscal impact of changes in law or policy decisions taken over the past year, and in the measures included in the budget; - Present the latest macroeconomic and fiscal forecasts. ### Conclusions: strengths and weaknesses - Strengths highlighted: - The legal framework is comprehensive though complex, and the budget documentation is also comprehensive and timely. - The timetable for the submission and approval of budget documents to the Congress is closely observed. - The fiscal policy framework is securely anchored in a fiscal consolidation plan and three fiscal rules that have been in place since 2014 are adhered to, though pressures for further fiscal consolidation in coming years may put the rules under strain. - The performance information and evaluation system is well developed, though it comprises about 5,000 performance indicators, and could be better linked to the budget preparation process. - The system for managing investment projects is generally transparent, but many contracts are not tendered openly and competitively. - The government publishes a Citizen’s Guide to the Budget and maintains an informative Transparency Portal, but the process of holding public hearings on budget issues is less developed. - Areas for improvement and weaknesses: - The coverage of the budget includes many off-budget funds, social security funds, parastatal organizations, non-financial public corporations and development banks, and earmarked revenues. - Few elements of a modern medium-term budget framework have been put in place. - The Congress does not have to approve proposals by the government for in-year adjustments to the budget, though these changes are substantial (on average, around 7 percent of the approved budget). - Macroeconomic and fiscal forecasts are prepared, but focus mainly on one year ahead, and are subject to substantial deviations compared to outturns. - There is a tendency for published forecasts to overestimate GDP growth (since 2013) and inflation, and to underestimate the growth of revenues and expenditure. - Mechanisms for the independent evaluation of macroeconomic and fiscal forecasts, or for validating that the government is complying with its fiscal targets and fiscal rules, have not been developed. - No information is currently published on the reconciliation of current forecasts with previous vintages. - Quantified deviations and coverage notes: - Medium: Over last 7 years average absolute deviation in real GDP forecast was 1.2 percentage points of GDP. - Medium: Over last 7 years average absolute deviation in annual revenue and expenditure forecasts was around 5%. - Basic: Mexico has an MTFF but a rudimentary MTBF. Budget documents include limited data on fiscal outturns in previous years. - High: Absence of an MTBF is a major weakness in fiscal planning and resource allocation. - Basic: Budget covers ministries, parastatals, and public corporations, but excludes many trust funds. Most revenues, spending, and financing shown on a gross basis. ### Key recommendations (pillars and specific measures) - Two main recommendations under this pillar of the Code: - Recommendation 2.1: The SHCP should strengthen the medium-term fiscal framework and the medium-term budget framework. Elements (implementation could be phased over 2-3 years): - Develop SHCP’s “Pre-Criteria” report into an annual fiscal strategy statement, with a medium-term perspective, that would provide a robust framework for preparing the budget. The statement would provide a review of the government’s fiscal performance over the past year, discuss challenges in meeting its fiscal consolidation targets, and include projections of fiscal developments on alternative scenarios. - Establish a process for separating the cost of new policy proposals from the underlying baselines of spending programs, and for making reliable forward estimates of spending, by administrative unit and program, over the medium term. - Set indicative ceilings for spending ministries and programs over the medium term. The ceilings would be rolled forward each year, with the new budget. - Adjust the presentation of the budget documents to show medium-term projections of spending on the same (or slightly reduced) level of detail as the annual budget. - Reconsider the use of performance indicators to strengthen their traction on the budget process, e.g., by focusing on a small sub-set of key indicators for each sector, ministry, or program. - Recommendation 2.2: Establish stronger mechanisms for the independent validation of the government’s macroeconomic and fiscal forecasts, and compliance with fiscal targets and rules. Options include: - Publishing information on the macroeconomic forecasts of other organizations (the Bank of Mexico, universities and research institutes, the OECD, the IMF and the World Bank, etc.) in the budget documents, and the Pre-Criteria report. - Establishing a committee of key stakeholders—the Bank of Mexico, the CEFP, the ASF, selected research institutes—that would meet twice a year, in March/April and August/September—to discuss the SHCP’s forecasts of macroeconomic and fiscal developments. The minutes of these meetings and any decisions of the government arising from them would be published. - Mandating the ASF to provide each quarter a formal assessment of the government’s fiscal performance in that quarter and its compliance with the fiscal targets/rules. - Two smaller recommendations: - (i) Publishing comprehensive information in the budget documents on financial transactions conducted by the approximately 246 federal trust funds. - (ii) Publishing information in the budget documents on the reconciliation of different vintages of macroeconomic and fiscal forecasts. ### Fiscal risks reporting (introductory material) - The next chapter assesses Mexico’s analysis, reporting, and management of fiscal risks against the practices of the FTC, covering: - General arrangements for disclosure and analysis of macroeconomic and specific fiscal risks; - Risks from government assets, liabilities, guarantees, the financial sector, or PPPs; - Coordination of fiscal decision-making between the central government, subnational governments, and public corporations. - Table 3.1 lists key government reports in Mexico that provide information on fiscal risks, including: - General Criteria for Economic Policy 2018 (Criterios Generales de Política Económica 2018) — SHCP — Annual - Annual Financing Plan 2018 (Plan Anual de Financiamiento 2018) — SHCP — Annual - Actuarial and Financial Report 2015 (Informe Financiero Actuarial 2015) — ISSSTE — Annual - Financial Stability Report (Informe anual sobre el estado que guarda la estabilidad del Sistema financiero en México) — CESF — Annual - Financial System Report, October 2017 (Reporte sobre el Sistema Financiero, Octubre 2017) — Bank of Mexico — Annual - Quarterly and Annual Reports on Public Finances and Public Debt (Informes Trimestrales y Anuales sobre Finanzas Públicas y Deuda Pública) — SHCP — Quarterly, Annual - Federal Revenue Law 2018 (Ley de Ingresos de la Federación para el Ejercicio Fiscal 2018) — SHCP — Annual - Federal Expenditure Budget 2018 (Presupuesto de Egresos de la Federación para el Ejercicio Fiscal 2018) — SHCP — Annual - PEMEX Annual Report Form 20-F filed with U.S. Securities and Exchange Commission — PEMEX — Annual - PEMEX Annual Report 2016 (Informe Anual PEMEX 2016) — PEMEX — Annual - Evaluation of Hydrocarbons Reserves, January 1, 2017 (Evaluación de las Reservase de Hidrocarburos, 1 de Enero de 2017) — PEMEX — Annual - Relationship between Reserves and Production, 2017 (Relación Reservas y Producción, 2017) — CNH — Annual - Statistical Information (Información Estadística) — CNH — Ongoing - Projections of Crude Oil and Refined Products, 2017-2031 (Prospectiva De Petróleo Crudo y Petrolíferos, 2017-2031) — SENER — Annual *IMF Staff Report (cr18289), selected excerpts.* ### 3.1 Risk Disclosure and Analysis ### 3.1 Risk Disclosure and Analysis ### 3.1.1 Macroeconomic Risks - Mexico has a moderately volatile economy: - Volatility of nominal GDP in 2003-16 was close to average compared to other G-20 countries and selected Latin American countries; lower than in most G-20 emerging market economies, but higher than in the group’s advanced economies. - Over 2003-16, there were two years when the rate of growth of nominal GDP was lower by more than one standard deviation than the average. - Revenue volatility and oil dependence: - The share of oil revenues in total revenues was about a third on average in 2003-16. - Volatility of oil revenue in real terms was close to three times the volatility of non-oil revenue. - Fiscal oil revenue over the period fluctuated between 3½ percent of GDP and 10½ percent of GDP. - Volatility of the annual price of the Mexican basket of crudes in 1999-2016 (measured by the standard deviation of percentage change) was 31 percent. - Oil production in 2017 was 2 mbd. - Risk identification by SHCP for the 2018 budget: - Main risks: unfavorable renegotiation of NAFTA, lower U.S. economic growth than projected, deterioration in international financial markets, lower oil prices and production than expected. - Sensitivity analysis published in Criterios Generales de Política Económica: - Sensitivities assessed only for the budget year; changes in variables are relatively small and considered separately. - Examples of sensitivity impacts in 2018 (impact in 2018 in percent of GDP): - Oil price: Oil price higher by US$1/b (revenue) 0.07; Oil revenue (-) -0.02; Financial costs (debt service) (+) 0.00 - Oil production: Increase in oil output by 50 mbd (revenue) 0.06 - Interest rate: Increase in the interest rate by 100 basis points (expenditure) 0.09 - Growth: One-half percentage point higher growth rate (tax revenue) 0.06 - Exchange rate: Ten-cent appreciation of the average exchange rate: -0.01 - The assumed ½ percentage point difference in GDP growth compares to a standard deviation of real growth of close to 2½ percentage points in 2003-16. - Over 1971-2016, the annual absolute percent change in the international oil price reported in the IMF’s WEO was higher in 9 out of 10 years than the 2 percent change used in the sensitivity analysis. - Stochastic projection of net public debt: - The Plan Anual de Financiamiento (PAF) includes simulated distributions of future debt outcomes for the next 6 years around the baseline; a fan chart shows predictive densities of public debt in percent of GDP. - Interest cost risk analysis: - PAF presents separate Cost-at-Risk (CaR) analyses for interest on domestic-currency debt and foreign-currency debt using parametric and non-parametric methods; non-parametric method based on past observations of interest rates and exchange rates used for total public debt CaR. - Oil hedging program: - Hedging aims to insure the price of oil from December prior to the fiscal year to November of the fiscal year using Asian put options. - Program cash flow benefits: yielded revenues of 0.5 percent of GDP in 2009, 0.6 percent in 2015, and 0.3 percent in 2016. - A range of 210-250 million barrels of oil a year was hedged during 2010-17. - Options strategy implemented by FEIP; cost funded from FEIP resources and additional budget transfers if needed. - Public information on hedging program available via press releases, quarterly reports, Auditoría Superior de la Federación (ASF) audit reports, and SHCP’s Transparency Portal. ### 3.1.2 Specific Fiscal Risks - Disclosure is partial and not comprehensive; relationship of disclosed risks to fiscal forecasts is often unclear. - GCEP contains a fiscal risks section but falls short of a comprehensive Fiscal Risk Statement. - Specific risks discussed include pensions, the health sector, the banking sector and development banks, and measures to mitigate natural disaster risk. - Not comprehensively discussed: risks from subnational governments, public corporations, government guarantees, natural disaster costs, lawsuits, quality of financial and non-financial assets, contingent liabilities related to PPPs. - No SHCP unit currently responsible for consolidating information on specific fiscal risks and analyzing fiscal implications. - Selected explicit fiscal risks of the central government (as reported): - Contingent liabilities: - Legal claims against the state: Gross exposure n.a.; Percent of GDP (2017) 1.2; cost billion MXN 50; Percent of GDP (2017) 0.2 - Debt guarantees (FARAC/FONADIN): Gross exposure 256 MNX billion; Percent of GDP (2017) 1.2 - Development Banks: Gross exposure 1,215 MNX billion; Percent of GDP (2017) 5.6 - Subnationals: Gross exposure n.a.; Percent of GDP (2017) n.a. - PPP contracts: Gross exposure n.a.; Percent of GDP (2017) n.a. - Natural Disasters: Gross exposure n.a.; Percent of GDP (2017) n.a.; memorandum: cost 50 billion MXN relates to claims for FONDEN - Total selected explicit fiscal risks: Gross exposure 1,152 MNX billion; Percent of GDP (2017) 6.6 - Memorandum item: pensions: Gross exposure 9,166 MNX billion; Percent of GDP (2017) 47 - Notes: - Development banks entry includes two types of granted guarantees to development banks: (1) 325 billion MXN, and (2) 890 MXN. - The contingent liability figure for Natural Disasters relates only to federal and sub-national infrastructure; gross exposure is an estimate for 5 key sectors of the average annual loss; the cost of 50 billion MXN relates to FONDEN claims covering more than 5 sectors and at least 18 risks. - The total selected explicit fiscal risks figure includes FARAC/FONADIN and development banks. ### 3.1.3 Long-Term Fiscal Sustainability Analysis — Not Met - No information on long-term sustainability of public finances or projected evolution of overall net worth in budget documents. - Fiscal projections are presented only for the next fiscal year and the following five years. - Some long-term information exists: - Prospective age structure of the population and pension liabilities in Criterios Generales; long-term projections for public sector social security systems. - Government estimated actuarial value of public sector pension liabilities (considering ISSSTE and special regimes) at 46.9 percent of GDP in 2016 (does not include liabilities of subnational pension systems). - Public healthcare spending projected to rise from 3.3 percent of GDP in 2015 to 8.7 percent by 2065. - Oil reserve/production ratio (R/P) at end-2016: 9 years for proven reserves, and 16 years for proven and probable reserves. - Long-term pressures summarized in Box 3.2: - Demographics: median age 28 years in 2015; expected to rise to 42 years by 2050. Share of population aged 65 or older projected to increase from 6 percent in 2010 to 17 percent in 2030. Population expected to start declining in 2065. - Pension liabilities: actuarial value of public sector pension liabilities 46.9 percent of GDP in 2016. - Healthcare costs: projected public healthcare spending increase to 8.7 percent of GDP by 2065. - Petroleum depletion: R/P ratios of 9 and 16 years pose long-term fiscal challenges and raise risk of obsolescence. - Recommendation: - Develop long-term fiscal projections to assess and plan for rising pension and health expenditures and potential depletion of petroleum reserves; use analysis to promote discussion of long-term strategies and policies to mitigate future pressures on public finances. ### 3.2 Risk Management ### 3.2.1 Budgetary contingencies (Advanced) - Contingency provisions: - Budget includes a line item for natural disaster relief, usually about 0.4 percent of the budget for programmable expenditure (varies year to year). - This reserve complements Mexico’s Natural Disaster Relief Fund and government access to the World Bank’s Disaster Risk Financing and Insurance (DRFI) Program. - Access and transparency: - Access to the contingency reserve for natural disasters is based on transparent criteria and operating rules, with decision-making managed by the Ministry of the Interior. - SHCP’s quarterly reports on budget execution include information on withdrawals from the reserve. - A smaller reserve fund exists to make transfers to subnational governments related to natural disasters and other emergencies. - SHCP confirmed these reserves have been fully adequate in recent years. - SHCP’s in-year adjustment powers reduce need for additional contingency provisions. ### 3.2.2 Management of Assets and Liabilities (Basic) - Legal and institutional arrangements: - There is a legal cap on borrowing; all public-sector borrowing, including guarantees, must be authorized by Congress. - Specific debt rules are set for subnational governments. - Law on PPPs sets a limit on total annual payments related to PPPs which must be considered before initiating new PPPs. *Source: cr18289 - 3.1 Risk Disclosure and Analysis (cr18289 - 3.1 Risk Disclosure and Analysis).* ### 101. Information on debt sustainability analysis and stochastic analysis of debt-related ### Information on debt sustainability analysis and stochastic analysis of debt-related ### Debt transparency and public debt policy - The SHCP publishes information on the debt structure of the central government in its Annual Financing Plan (PAF), including: - breakdown of internal and external debt, currency denomination, amortization profiles, sources of lending, maturities, servicing costs, interest rate and exchange rate risk exposure. - In December 2016, the gross debt of the general government was estimated at 56.8 percent of GDP excluding the T-bonds used by the central bank for monetary operations. - The PAF presents annually the main elements of the Federal Government’s public debt policy, which aims to cover financing needs “at the lowest possible cost, at an acceptable level of risk.” - PAF 2018 summarizes, for the first time, main elements of debt policy of other public sector entities that frequently access debt markets. - Portfolio risk analysis findings: - Greater part of federal government’s debt is denominated in pesos. - Most government securities issued in the local market, and all external market debt, are fixed-rate assets. - Federal government has reduced refinancing risk by maintaining a portfolio where long-term instruments predominate. ### Public sector assets and non-debt liabilities (coverage and gaps) - No publicly available analysis of risks surrounding non-debt liabilities and financial and non-financial assets. - 2016 valuation: - Public sector financial and nonfinancial assets: around 62.5 percent of GDP. - Financial assets of general government: 37.4 percent of GDP. - Largest component: currency and deposits at the central bank: 27.3 percent of GDP. - Public sector non-debt liabilities: 70.9 percent of GDP in 2016. - The government does not have a policy to calculate effects of inflation, interest rates, exchange rates, and company performance on public sector non-debt liabilities. - Recommendation in text: SHCP should prepare a register of nonfinancial assets and develop a strategy for managing them. ### Non-organic trust funds: scope, disclosure, and risks - Net worth of non-organic trust funds represented about 2.7 percent of GDP in 2016. - Limited information is published on their use; further analysis is needed to evaluate associated risks. - Table 3.4 summary (Net Worth, December 2016, in Million MXN): - Administration of Funds: Register of the Policy and Budget Control Unit: 339 funds; Net Worth 549,808 - Mexican Petroleum Fund (FMP): 1 fund; Net Worth 53 - TOTAL (1+2): 340 funds; Net Worth 549,861 - By Beneficiary — A Federal Public Sector: 245 funds; Net Worth 536,352 - Federal Government (Includes FMP): 85 funds; Net Worth 319,252 - Financial Support: 46 funds; Net Worth 107,301 - Budget Stabilization: 2 funds; Net Worth 110,194 - Infrastructure: 11 funds; Net Worth 72,250 - Pensions and Employment Benefits: 9 funds; Net Worth 19,532 - Subsidies and Support: 17 funds; Net Worth 9,976 - Social Security: 9 funds; Net Worth 701 - Parastatal Companies with Governmental Activity: 82 funds; Net Worth 37,293 - Financial Support: 20 funds; Net Worth 1,575 - Infrastructure: 1 fund; Net Worth 142 - Pensions and Employment Benefits: 12 funds; Net Worth 14,418 - Subsidies and Support: 49 funds; Net Worth 21,157 - Parastatal Companies with non-Financial Commercial Activity: 30 funds; Net Worth 66,302 - Financial Support: 7 funds; Net Worth 4,743 - Infrastructure: 8 funds; Net Worth 53,657 - Pensions and Employment Benefits: 14 funds; Net Worth 7,899 - Subsidies and Support: 1 fund; Net Worth 4 - Parastatal Companies with Financial Commercial Activity: 39 funds; Net Worth 112,803 - Financial Support: 14 funds; Net Worth 13,064 - Infrastructure: 1 fund; Net Worth 120 - Pensions and Employment Benefits: 20 funds; Net Worth 69,147 - FID. 2065.- BANOBRAS' Pension Plan for Retired Staff: 1 fund; Net Worth 19,538 - Subsidies and Support: 4 funds; Net Worth 30,472 - B. State Level: 65 funds; Net Worth 8,806 - Trust Fund 1928: 1 fund; Net Worth 5,033 - Others: 64 funds; Net Worth 3,772 - C. Private Sector: 30 funds; Net Worth 4,704 - Notes: - Table excludes FEIEF (state-level revenue stabilization fund) Net Worth 30,277 million MXN at end-2016. - Table excludes FIES (state infrastructure trust) Net Worth 2,311 million MXN at end-2016. - Example risk: some funds making risky investments such as PPPs. ### Guarantees: magnitude, disclosure gaps, and contingent exposure - As of end-2017, total stock of explicit recorded federal government guarantees estimated at about 6.6 percent of GDP. - Components cited: - Guarantees to FARAC/FONADIN: 256 billion MXN. - Government-guaranteed debt securities issued by development banks: 890 billion MXN. - Guarantees of mortgage securitizations and risk capital: about 325 billion MXN. - Deposit insurance (IPAB) resources could be exhausted; potential government liability could be as high as 2,225 billion MXN, equivalent to 10.25 percent of GDP. - Legal/regulatory observations: - Issuance of guarantees is regulated by law, but no statutory limit on flow or stock of guarantees. - No published information on the form of guarantees or a detailed list of beneficiaries. - Federal government may issue guarantees to SNGs subject to requirements, but in practice has not done so. ### Public-Private Partnerships (PPPs): framework, disclosures, and limits - Regulatory framework strengthened: 2012 PPP Law amended in 2016 and 2017; manual and guidance issued to help analyze PPP risks and value-for-money. - PPP program status: - 22 PPP projects authorized to date, total value 41.5 billion MXN, covering transportation, health, safety and water sectors. - SHCP statement: in principle, all PPP risks are shared with private sector, no explicit guarantees, all PPP contracts published and summarize government rights and obligations. - Capacity and historical performance concerns: - Uncertainty about federal government capacity to comply with robust analytical requirements. - Transport sector traffic volume estimates over last ten years were often inaccurate, affecting project viability assessments. - Quantitative limit on new PPP obligations: - Ceiling: one percent of total programmable expenditure in the budget (may vary year to year). - SHCP includes in the budget an estimate of maximum annual payments for PPP projects. - SHCP makes some medium-term projections of PPP budgetary impact. - Transparency improvements: - Information published by sponsoring ministries and on SHCP’s transparency portal. - SHCP quarterly reports to Congress include approved and under-review PPPs: private counterpart, contract term, total investment amount, other financial data, schedule of payments. - Unsolicited PPP proposals may be accepted but must be linked to national policy objectives, subject to risk analysis, and disclosed. - Annual payment commitments for PPPs disclosed for 2017–2023 in Criterios Generales. - For 2018, payment commitments for PPPs under execution and operation estimated at 7.7 thousands of million MXN. - PIDIREGAS disclosures and status: - PIDIREGAS mechanism capped and ended effectively in December 2006; PEMEX’s existing PIDIREGAS commitments considered direct public debt. - Government discloses estimates of annual payment obligations for direct and conditional PIDIREGAS. - Annual payments for 2018 estimated at 71 billion MXN (direct) and 92 billion MXN (conditional). - Table 3.5 summary (PPPs — Total investment in PPPs): - Total projects: 22 - Total Amount Investment: 41,548.1 million pesos - Sectors/subsectors (selected lines): - Communications and Transports — Highway Development (SCT): 1 project; 954.3 million pesos; Average Contract Term 30; Stage Construction - Highway Conservation: 10 projects; 21,911.1 million pesos; Average Contract Term 10; Stage Construction/Recruitment - Health (IMSS): 4 projects; 7,188.3 million pesos; Average Contract Term 25; Stage Construction/Recruitment - Health (ISSSTE): 5 projects; 6,621.8 million pesos; Average Contract Term 25; Stage Construction/Recruitment - Environmental — Water (CONAGUA): 1 project; 1,350.7 million pesos; Average Contract Term 20; Stage Bidding Process - Security (SEGOB): 1 project; 3,521.8 million pesos; Average Contract Term 20; Stage Bidding Process ### Financial sector exposure and fiscal risks from development banks - Overall assessment: Financial Sector Exposure — Good. - December 2016: aggregate liabilities of government-controlled financial institutions exceed 10 percent of GDP. - Key disclosures: - Fiscal risks from deposit insurance and development banks are quantified and disclosed. - IPAB (deposit insurance) has substantial resources; possible government liability up to 2,225 billion MXN (10.25 percent of GDP) if resources exhausted (see Guarantees section). - Financial system resilience: - Improvements in regulation and supervision since the 1995 banking crisis. - Mexico implemented Basel III reforms. - Bank of Mexico publishes comprehensive twice-yearly financial stability reports including stress tests. - CNBV and central bank websites provide comprehensive, timely bank financial data. - Development banks: concentrated fiscal risks - FSAP 2016 highlighted critical risks posed by development banks. - Aggregate liabilities of development banks: 860 billion MXN (4 percent of GDP in 2016). - Estimated contingent liabilities associated with induced credit: 177 billion MXN (0.8 percent of GDP). - SHF and NAFIN have the largest contingent liabilities (referenced Figures in source). - Concern: need to ensure sustainable leverage, avoid market distortions and crowding out. - Capitalization regulatory minimums do not eliminate fiscal risks. - Large macroeconomic shocks (e.g., major changes to Free Trade Agreement with the U.S. and Canada) could create severe problems for entities borrowing from development banks (e.g., Bancomext). - CNBV reports frequent stress tests for development banks; central bank does not conduct these tests. - Suggested actions: Central Bank and CNBV should test impact of macroeconomic shocks on development banks’ profit; closer coordination between Bank of Mexico and SHCP on management of fiscal risks created by banks. _Italic: Source: Authorities (excerpt from the provided IMF chapter content)._ ### 114. Using the development banks to carry out government policies currently does not ### 114. Using the development banks to carry out government policies currently does not ### Development banks: role, recent expansion, and capitalization - Development banks carry out public policy obligations determined by Mexico’s national development plan (2013-2018 goal: reach 7.9 per cent of GDP for the total of direct and impulsed credit that encompass induced credit (guarantees and loans granted by private financial intermediaries guaranteed by development banks) and the holding of securitizations and the venture capital granted to the private sector by the development banks). - Financial reforms published in the Federal Official Gazette on January 10, 2014, enhanced the public service mandate of the development banks to provide access to credit to those who have financing needs. - These two measures explain development banks’ credit expansion without depending on budgetary support. - Aggregated assets of development banks with risk exposure show a capitalization index that exceeds 16 percent, more than double of the regulatory minimums. - Individual development banks experienced large increases in assets with credit risks between June 2014 and June 2017: - Bancomext: 92 percent increase - Banjercito: 71 percent increase - Nafin: 84 percent increase - Bansefi: 138 percent increase ### Fiscal risks from development banks - Main fiscal risks: potential direct loans default and realization of guarantees. - In June 2017: - Balance of direct loans: 1,012 billion MXN (accounted for 4.9 per cent of GDP). - Guaranteed portfolio, the securitized mortgage (without considering the exposed balance of the intermediary) and capital risk: 294 billion MXN (equivalent to 1.4 per cent of GDP). - Direct credit by sector (government, private sector, intermediary agent) increased substantially in several banks between June 2014 and June 2017: - Direct credit to governments: Bancomext increased 226 percent; NAFIN increased 155 percent. - Direct credit to the private sector: Bansefi increased 415 percent. - Assessment: While current risks associated with development banks appear to be very limited, fiscal risks from direct loan defaults and realization of guarantees could materialize in case of any potential macroeconomic shocks to the economy. ### Natural resources: petroleum sector importance and volatility - Petroleum revenue has accounted on average for one-third of federal public sector revenues since the mid-1990s; in 2015-16, the contribution of oil revenues to total revenues fell on average to 18 percent. - PEMEX revenues fell from 10-11 percent of GDP in 2011-14 to 6 percent of GDP in 2015 and stayed at that level in subsequent years, reflecting lower oil prices and declining production. - Consequence: Fall in revenue to the Federal Government as direct taxes paid by PEMEX fell by four percentage points of GDP. PEMEX reduced investment to contain spending. - Projections and experience: - Medium-term petroleum production projections can be uncertain; 2014-17 saw continued production declines despite successive projections that had forecast rising production. - More recent projections have been more conservative. - Reserves and valuation: - Proven reserves declined to around 7 billion barrels, translating into a production horizon (R/P ratio) of 9 years at current production rates. - Proven and probable reserves: 13 billion barrels, R/P ratio of 16 years. - NPV of cash flows before tax in percent of GDP of the year of estimate: - Fluctuated between 60 and 70 percent of GDP in 2011-13. - Fell steeply to 11-17 percent of GDP in 2015-16. - Estimated net value of the reserves fell from US$750 billion in 2013 to US$115 billion in 2016. - Drivers: fall in international oil prices, production not replaced by additions to reserves, reduction in field development activities, and assignment of less than 10 percent of total reserves to private contractors. - Projections and scenarios: - SENER 2017 projections for 2017-31 include two scenarios for crude oil production: - Minimum scenario: exploration and extraction of 2P reserves. - Maximum scenario: extraction and exploration of 3P reserves. - Recommendation on reserves valuation: - Complete the valuation of petroleum reserves and include them in public sector assets and liabilities. - The bulk of reserves is already valued by PEMEX; CNH could aggregate monetary reserve estimates provided by contractors and add them to PEMEX estimates to derive a monetary value of the nation’s proven reserves. - Alternatively, implement the UN’s System of Environmental-Economic Accounts for Energy methodology. - Publish estimates in budget documents with appropriate qualifications noting high uncertainty, measurement difficulties, and volatility over physical volumes and prices. ### Information, reporting, and governance in oil and gas - Data availability: - CNH, SENER, PEMEX, and INEGI publish regular statistics and analyses on production, prices, exports, imports, and domestic sales. - SHCP, PEMEX, and the Fondo Mexicano del Petróleo (FMP) provide information on fiscal petroleum revenues in annual, quarterly, and monthly reports. - CNH and PEMEX publish statistics on reserves classified by probabilities of recovery; all estimates are externally audited by specialized petroleum companies. - Methodology and auditing: - PEMEX publishes annual externally-audited estimates of reserves (1P, 2P, 3P) using SEC, SPE, PRMS, and other SPE procedures; estimates are audited by three external independent engineering firms and reviewed/approved by CNH. - Operators in assigned areas must quantify reserves annually (1P, 2P, 3P) using PRMS methods and have them certified by an independent third party registered with CNH; reserves must be valued according to standardized NPV methods. - PEMEX publishes estimated NPV of proven reserves using projected future net cash flow before tax with a discount rate of 10 percent and a projection horizon (in 2016 the horizon extended to 2042). ### Environmental risks and disaster exposure - Mexico’s exposure: - Around 41 percent of Mexico’s territory and 31 percent of its population are exposed to hurricanes, storms, floods, earthquakes, and volcanic eruptions. - The World Risk Report (2017 edition) ranked Mexico 94th out of 171 countries most at risk from natural disasters. - According to EM-DATA, Mexico ranks high in terms of the annual cost of damages from natural disasters. - Risk measurement and management: - Since 2007, FONDEN implemented a catastrophe risk model R-FONDEN for financial decision-making, providing scenario-based and probabilistic analysis at national, state, and sub-state levels for four major disaster categories. - R-FONDEN focuses on economic and social infrastructure in five key sectors: education, health, roads, the hydraulic sector, and low-income housing. - R-FONDEN uses a detailed exposure database to estimate annual expected loss and probable maximum loss (PML). - SHCP uses R-FONDEN in combination with an actuarial analysis of historic loss data to monitor FONDEN’s portfolio and design risk transfer strategies. - Most of this information is not publicly available. *Source: IMF staff report (content unit: cr18289 - 114).* ### 128. Extensive Information is available on the national disaster risks financing strategy. The ### cr18289 - 128. Extensive Information is available on the national disaster risks financing strategy. The ### National disaster risk financing and FONDEN - The GCEP provides information on the government’s policies for mitigating natural disasters. - For 2017, the cost of natural disasters (equivalent to about 0.25 percent of GDP) was more than double the estimated losses based on probabilistic calculations made by the authorities (0.1 percent of GDP). - FONDEN has evolved into one of the cornerstones of Mexico’s integrated disaster risk management strategy. - Other sources of financial support include: - the contingency reserve in the budget (see Section 3.2.1); - the FOPREDEN Program for Natural Disaster Prevention; - the Emergency Relief Fund (covers activities immediately before or after a disaster). - To manage volatility, the government has enabled the FONDEN Trust to pay premiums and receive loss payments from risk transfer instruments. - Catastrophe risk transfer history and coverage: - Mexico’s first catastrophe bond was issued in 2006, followed by renewals in 2009, 2012, 2017 and 2018. - An indemnity-based insurance for FONDEN losses has been in place since 2011 and renewed annually. - In 2017, the government renewed insurance coverage up to 5,000 million MXN. - In 2017, the government renewed the Catastrophic Bond issued by the World Bank (coverage up to 360 million USD). ### Natural Disaster Exposure and Expected Annual Loss (Table 3.6, in Million MXN) - Note: Exposure refers to the estimated amount of the infrastructure value. Average Annual Loss refers to the average loss during a year. Probable Maximum Loss (PML) is associated with events whose return periods are 20 and 100 years, respectively. - Sector-level figures: - Health - Exposure: 77,010 - Average Annual Loss: 278 - Probable Maximum Loss 95% PML: 435 - Probable Maximum Loss 99% PML: 1,303 - Education - Exposure: 419,846 - Average Annual Loss: 1,103 - Probable Maximum Loss 95% PML: 1,902 - Probable Maximum Loss 99% PML: 6,164 - Social Development - Exposure: 604,485 - Average Annual Loss: 1,866 - Probable Maximum Loss 95% PML: 3,105 - Probable Maximum Loss 99% PML: 7,966 - Hydraulic Sector - Exposure: 286,785 - Average Annual Loss: 2,223 - Probable Maximum Loss 95% PML: 520 - Probable Maximum Loss 99% PML: 1,197 - Roads - Exposure: 1,399,957 - Average Annual Loss: 1,137 - Probable Maximum Loss 95% PML: 1,706 - Probable Maximum Loss 99% PML: 6,295 - Total - Exposure: 2,788,083 - Average Annual Loss: 6,606 - Probable Maximum Loss 95% PML: 7,667 - Probable Maximum Loss 99% PML: 22,926 - Source: Authorities ### Sub-national governments (SNGs): size, data, and debt monitoring - SNGs represent a substantial part of the public sector; their total expenditure represents about 11 percent of GDP. - Data disclosure: - Financial information on states is published annually and quarterly. - Municipal-level data are not disclosed (municipalities are a much smaller sector). - Subnational debt: - Subnational debt as a ratio of GDP was about 3 percent of GDP at the end of 2016. - The balance of the financial obligations of the states increased from 116 billion MXN at the end of 2002 to 560 billion MXN in the third quarter of 2017. - Distribution of subnational debt by creditor type (as of third quarter of 2017): - multiple banking: 60.1 percent - development banks: 22.1 percent - bonds: 15.8 percent - trusts: 2.0 percent - Distribution of debt balances by type of borrower: - governments of the Federal Entities: 84.8 percent - Municipalities, with financial obligations: 8.1 percent - State Public Entities: 6.0 percent - Municipal Public Entities: 1.1 percent - The most indebted states in absolute terms include Ciudad de México, Nuevo León, Chihuahua, el Estado de México, and Veracruz. - Legal and institutional framework: - Sub-national borrowing and debt is controlled by law (Financial Discipline law and General Law of Government Accounting). - The SHCP requires SNGs to publish quarterly information on finances and has made progress in aggregating states’ debt data. - Early Warning System (EWS) for states: - The SHCP established an Early Warning System that requires each state to provide quarterly indicators to a public registry: - (i) ratio of public debt and other obligations to non-earmarked revenues; - (ii) ratio of debt service and other obligations to non-earmarked revenues; - (iii) ratio of short-term obligations to suppliers/contractors to total revenues. - The EWS classifies states into three categories: - Green (sustainable) - Yellow (under observation) - Red (high level of indebtedness, may require remedial action) - Thresholds for the three indicators respectively: - Green: <=100%, <=7.5%, <=7.5% - Yellow: <=200%, <=15%, <=12.5% - Red: >200%, >15%, >12.5% - At present, only one state was noted as in the “Red” category. - Uncertainty remains about the federal government’s powers to require remedial measures and what those measures would comprise. - Municipalities: - Indicators of financial performance and debt are not yet available for municipalities. - The SHCP planned to finalize implementation of the EWS for municipalities in 2018. - An initial informative evaluation for municipalities was invalidated pending the Fiscal Discipline Law reform requirement that the first evaluation be published during 2018. ### Public corporations (PCs): scope, governance, and transparency gaps - Treatment and scale: - Public corporations in Mexico are treated as part of the organizational structure of the government, not as a separate class as per GFSM 2014. - Estimates indicate approximately 49 nonfinancial public corporations and 19 financial public corporations. - Revenues: nonfinancial PCs 9.9 percent of GDP; financial PCs 1.5 percent of GDP. - Total liabilities: nonfinancial PCs 23.3 percent of GDP; financial PCs 10.6 percent of GDP. - Composition of parastatal organizations (approximately 200 entities) includes four categories: - (i) state-owned decentralized agencies (national lottery, social security institutions, postal service, hospitals, etc.); - (ii) companies majority-owned by the government with commercial orientation (ports, salt distributor, federal printing company, film and TV studios, etc.); - (iii) public trust funds (organic and non-organic funds; only “organic” funds are considered parastatal entities and hence PCs); - (iv) state-owned productive companies (notably Comisión Federal de Electricidad (CFE) and PEMEX and their subsidiaries). - Development banks and FND: - The list includes six development banks and a decentralized agency (FND) with similar functions. - Development banks account for about one-fifth of the credit operations of the banking sector (their share increased from about 17 percent in 2012 to 20 percent in 2017, excluding off-balance sheet operations). - These banks are responsible for agriculture and rural economy, industry and SMEs, housing, and infrastructure development in states and municipalities. - Budget consolidation and governance: - Budgets of PEMEX, CFE, and development banks are consolidated by the SHCP; transfers are shown on a gross basis except for PEMEX. - Corporate governance arrangements include boards with SHCP and other ministry representatives, audit/credit/risk committees, IFRS, and internal audit regimes. - Development banks are supervised by the Bank of Mexico and Mexico’s National Banking Commission and operate within macro-prudential requirements similar to commercial banks. - PEMEX governance and reporting meet high international standards due to U.S. trading links and bond issuance on the U.S. market. - Gaps and ongoing work: - No comprehensive framework for corporate governance and financial management of PCs has yet been developed. - SHCP has identified a preliminary list of approximately 80-90 entities that meet GFSM characteristics of a public corporation and begun classifying them by objectives and activities (commercial or institutional). - SHCP is drafting a common financial management framework to be overseen by a unit in the SHCP. - Possible components of such a framework (aligned with international good practice) include: - an ownership policy; - corporate governance arrangements; - accounting and reporting requirements; - performance management system; - rules for managing and reporting quasi-fiscal activities (QFAs). - A report on the overall financial performance of the public corporation sector, including information on QFAs, should be published. - Quasi-fiscal activities: - Information on QFAs of public enterprises and development banks in Mexico is fragmented and limited. - Example: development banks may be allocated funds from the state budget used to guarantee lending by counterpart commercial banks for support of SMEs and other activities. - A recent IMF study indicates electricity tariffs have been set at below cost-recovery levels and these subsidies are not transparent. ### Conclusions and recommendations (fiscal risk assessment and disclosure) - Mexico faces diverse and significant fiscal risks: - GDP and government revenue are relatively volatile. - Petroleum revenues impart volatility and generate significant short-, medium-, and long-term risks. - The public sector faces growing long-term pressures from the public pension system and rising healthcare costs. - Specific fiscal risks appear substantial and interconnected. - The country is exposed to large risks from natural disasters. - Strengths and gaps in fiscal risk management: - Strength: The budget includes an adequate and transparent allocation for contingencies that arise during the execution of the annual budget, notably for natural disasters. - Weaknesses and recommendations: - Macroeconomic risk analysis is basic; limited information on the long-term sustainability of public finances in budget documents — enhance macroeconomic and long-term fiscal risk analysis and disclosure. - Analysis and management of specific fiscal risks are diffuse across institutions; disclosure of specific risks is not comprehensive and their relation to fiscal forecasts is unclear — clarify institutional responsibilities and improve disclosure linking risks to fiscal forecasts. - Analysis of risks surrounding non-debt liabilities and financial and non-financial assets is not publicly available — publish comprehensive analysis of non-debt liabilities and assets. - Substantial risks arise from non-organic trust funds; these are largely undisclosed. The net worth of these funds represents about 3 percent of GDP — improve transparency and oversight of non-organic trust funds. - Guarantees provided by the federal government are substantial but not fully disclosed — disclose contingent liabilities from guarantees. - Transparency and accountability of PPPs have improved with revised law and regulations, but concerns remain about federal capacity to implement new regulations — strengthen implementation capacity. - Significant fiscal risks are associated with state-owned development banks (one-fifth of the banking sector) which are not fully analyzed and disclosed — enhance analysis and disclosure of development banks’ fiscal risks. - The government quantifies natural disaster risks, which are well covered by budgetary contingencies and other financial support mechanisms, but little information on these risks is published — publish more information on quantified natural disaster risks. - The sub-national government sector is substantial (11 percent of GDP); an early warning system monitors states’ debt sustainability, but there are concerns about data reliability — improve data quality and roll out the system to municipalities. *Source: Authorities (excerpts reproduced from the supplied IMF content).* ### 141. To strengthen its fiscal risk management practices, the government could consider ### cr18289 - 141. To strengthen its fiscal risk management practices, the government could consider ### Strengthening fiscal risk management: recommendations - Recommendation 3.1: Strengthen SHCP analysis of macroeconomic risks and incorporate other risks to better determine fiscal policy. - Sensitivity analysis of the baseline medium-term macroeconomic framework in the GCEP should include larger shocks, and combined shocks such as a simultaneous reduction in economic growth and the oil price. - Present alternative macroeconomic and fiscal scenarios and discuss the channels through which the macroeconomic scenarios and specific risks are expected to impact the main revenue and expenditure items in the budget. - Extend analysis to include the impact of exogeneous shocks on fiscal outcomes, and the impact of combined macroeconomic and specific fiscal risk shocks. - Recommendation 3.2: Prepare a summary report quantifying and disclosing the main specific fiscal risks and include a strategy to manage the identified risks in coordination with key stakeholders. Steps: - Develop a clear methodology to identify and quantify the main specific risks (e.g., risks related to guarantees, lawsuits against the state, assets and liabilities, development banks, states and municipalities, PPPs, and public corporations). - Develop a clear strategy and policy to mitigate these risks in consultation with relevant stakeholders. - Establish a risk management unit within the SHCP, responsible to prepare and publish summary reports on specific risks, and monitor the implementation of the strategy. - Recommendation 3.3: Establish a comprehensive framework for the financial governance and oversight of non-financial public corporations (apart from PEMEX and CFE which already have their own corporate governance and financial supervision regimes). Proposed main elements (implementation period: 2-3 years): - Establish a list of non-financial public corporations (from the SHCP’s set of about 200 parastatal organizations) that complies with the GFSM definition (commercial entities selling goods and services in the market, and controlled by the government). - Develop a framework for financial oversight including an ownership policy, a corporate governance framework, procedures for financial reporting based on key performance targets, publication of quarterly and annual performance reports, and the analysis and reporting of QFAs. - Publish a consolidated report of non-financial and financial public corporations in the budget documents, and SHCP’s quarterly reports. - Set up a unit in the SHCP responsible for implementing and enforcing the financial oversight regime, and for developing a monitoring system that provides early warning if any corporation is under-performing or in financial difficulties. - Enact modifications to the LFPRH and operational regulations, as required, to implement the new arrangements. - Other recommendation: - Budget documents and other policy statements should include long term projections for the public finances, which could be updated every few years. ### Table 3.7 — Summary assessment: Pillar III fiscal risk analysis and management practices (selected findings and numeric metrics) - Risk Disclosure and Analysis - 3.1.1 Macroeconomic risks: Assessment = Basic: Limited use of sensitivity analysis or stochastic analysis. No alternative macroeconomic scenarios are presented. Importance = High: Volatile petroleum revenue and other macroeconomic risks increase uncertainty of public finance outcomes. - 3.1.2 Specific Fiscal Risks: Assessment = Basic: Not all specific risks are disclosed, and the link between risks and forecasts is unclear. Importance = High: Some specific risks are important, including guarantees to PCs and development banks (of which guarantees are 3.9 % of GDP). - 3.1.3 Long-Term Fiscal Sustainability Analysis: Assessment = Not met: Except for pensions, no long-term analysis of fiscal trends and debt sustainability is published. Importance = Medium: Mexico faces pressures from rising health and pension spending, and exhaustion of oil reserves. - Risk Management - 3.2.1 Budgetary contingencies: Assessment = Advanced: There is contingency allocation and a reserve fund for natural disasters, with clear access criteria and transparent reporting. Importance = Low: Contingencies represent about 0.4% of programmable spending. - 3.2.2 Asset and Liability Management: Assessment = Basic: There is a legal cap for borrowing, and DSA and stochastic analysis of debt stock are published. But there is no analysis of risks surrounding non-debt liabilities and assets. Importance = High: Public sector liabilities represent 124 percent of GDP. - 3.2.3 Guarantees: Assessment = Not met: While gross exposure of guarantees is published, the complete list of all beneficiaries of guarantees is not disclosed. Importance = Medium: Stock of existing guarantees represents about 5.5 percent of GDP. - 3.2.4 Public-Private Partnerships: Assessment = Advanced: Much data published on PPP projects including on the government’s rights and annual obligations. There is an annual cap on total PPP obligations. Importance = Medium: The 22 PPPs represent about 0.2 percent of total GDP. - 3.2.5 Financial Sector Exposure: Assessment = Good: The authorities regularly assess financial sector stability. Low level of government support, and risks are limited. However, not all plausible scenarios are analyzed (e.g., related to development banks). Importance = Medium: Banks have aggregate liabilities of 10 percent of GDP. Public banks are large, and highly leveraged. - 3.2.6 Natural Resources: Assessment = Basic. Plentiful published data on petroleum reserves (audited), production volume, sales, and fiscal revenues. Importance = Medium: Petroleum reserves are a significant and volatile component of public assets. - 3.2.7 Environmental Risks: Assessment = Basic: Extensive information is available on the national disaster risks financing strategy. However, quantification of risks is only done internally but not published. Importance = Low: Natural disaster relief cost represents a 0.2 percent of the GDP. - Fiscal Coordination - 3.3.1 Sub-National Governments: Assessment = Basic: States publish quarterly financial performance indicators and debt data, but information on local governments is limited. Importance = High: SNGs are a substantial part of the public sector and their total expenditure represent about 11 percent of GDP. - 3.3.2 Public Corporations: Assessment = Basic: Transfers are disclosed quarterly, but no consolidated performance assessment report, or recording of QFAs. Importance = Medium: Total expenditure of two major PCs (PEMEX and CFE) and development banks account for 13 percent of GDP, but the two major PCs are in the budget. ### IV. Resource revenue management — key findings on petroleum sector (chapters 142–149) - Scope and focus: - This chapter assesses fiscal transparency practices associated with the government’s management of petroleum revenues, based on a draft of the Natural Resource Revenue Pillar of the FTC released for public consultation in April 2016. - Focused on four sector-specific dimensions: Legal and fiscal regime; Allocation of resource rights and collection of revenue; Company reporting; Resource revenue management. - Recent production and consumption metrics: - In 2016, Mexico was the 11th largest oil producer in the world. - In 2017, oil production was close to 2 million barrels per day (mpbd), of which about half was exported. - Domestic consumption of refined petroleum products is about 1.4 mpbd, with imports of refined products complementing domestic production. - Crude oil production declined from its peak in 2004 of 3.4 mbpd. - Natural gas: - Mexico has been a net gas importer since 2002; imports have grown significantly while production has fallen by about 10 percent since 2013. - In 2014, natural gas represented 40 percent of total energy consumption. - Petroleum revenues: - Petroleum revenues have declined from the long-standing average of about one third of revenues to less than 20 percent, reflecting the fall in oil prices since 2015, lower production volumes, and efforts to strengthen non-oil revenue. - Energy reform and sector governance: - The 2013 constitutional amendments and 2014 legislation opened the petroleum sector to private participation, ended the 75-year old state monopoly, and allowed the state to enter into a wide range of risk-sharing contracts with the private sector. - About 70 companies now conduct exploration and production in Mexico. Over 70 contracts have been signed as of January 2018-. - The legal and institutional framework assigns responsibilities across SENER, SHCP, CNH, FMP, and SAT; PEMEX is a “state productive company” with operational autonomy. - Contracting and entitlements: - Entitlements: Under the ‘Round Zero’ process, SENER granted PEMEX rights over 83 percent of proven and probable reserves and 21 percent of Mexico’s prospective resources. There are currently 428 entitlement agreements in place between SENER and PEMEX. - Contracts: The framework allows license contracts, production-sharing contracts, profit-sharing contracts, and service contracts. To date, 71 such contracts have been concluded. - PEMEX transition: PEMEX had concluded 22 service contracts prior to reform; PEMEX may request migration of service contracts and entitlements to the new contract regime. To date, PEMEX has migrated 2 service contracts and has migrated 2 entitlements to contracts under this migration process. *IMF staff report content.* ### 154. All relevant laws, regulations, and contracts are public and easily accessible, and the ### cr18289 - 154. All relevant laws, regulations, and contracts are public and easily accessible, and the ### Transparency of Legal Framework and Access to Information - Core legal framework for the upstream sector has been streamlined into a handful of laws and regulations, which are all publicly available on the government-wide website. - No legal impediments to the disclosure of non-commercially sensitive information. - Under the legal framework, all geological and technical data is deemed to be the property of the state. - Law requires contracts to contain provisions to ensure transparency of information and documents derived from the contract (with the exception of technical data and intellectual property). - All signed entitlements and contracts are publicly accessible; model production sharing and license contracts as well as joint operating agreements (for PEMEX farm-outs) are available for all licensing rounds held to date. - Reporting requirements of SENER and CNH with respect to exploration and extraction activities are mandated; information is required to be published in formats facilitating use and understanding via electronic media and information technology. - The Federal Law of Transparency and Access to Public Government Information provides a public right to access information held by public authorities, subject to certain exemptions. ### Fiscal Regime for Natural Resources - The upstream petroleum sector fiscal regime sets out in legislation and contracts the rates and base of fiscal instruments, and the scope for variation in fiscal terms between contracts. - Entitlements granted to PEMEX are subject to a specific fiscal regime (summarized in Figure 4.1a). - Multiple contract types exist: license contracts, production-sharing contracts, profit-sharing contracts and service contracts—each implying different fiscal regimes. - For each contract type, some terms are determined under the Hydrocarbons Revenue Law and model contracts, while others are specified as biddable variables. - Contractors are individually liable to pay statutory income taxes and can consolidate revenues and costs across contracts. - The Hydrocarbon Revenue Law sets out the income tax rate applicable to contract and entitlement holders, with special rules for accelerated depreciation and allowable period for carrying forward losses in deep water projects. - Contractors are subject to statutory indirect taxes and fees, including the hydrocarbons exploration and extraction tax specified in the Hydrocarbons Revenue Law. - As owner of PEMEX, the government can require PEMEX to pay an annual state dividend, determined on a discretionary basis. - Observation: The range of regime types and number of instruments adds complexity—"a more streamlined approach could achieve the same fiscal objectives." Key fiscal figures and terms preserved from the source: - ProfitSharingFee: 65% of Production Value–Cost Deductions (subject to cost caps) - IncomeTax: 30% of Revenue minus Cost Deductions - State marketer service payments: US$0.18 per barrel of oil; US$0.020 per MMBtu of gas sold ### Variation in Contract Terms and Ringfencing - Principal sources of variation in terms across contract areas are the choice of contract and the bid variable. - Government has flexibility to choose fiscal system and biddable variables for each tendered area. - License contracts awarded for onshore and deep-water areas; production sharing contracts concluded for shallow water areas. - All bids, evaluation criteria and contracts have been made public; CNH publishes a contract summary stating the bid variables applicable under each signed contract. - Fiscal payments by PEMEX under the entitlement regime are ringfenced by five regional classifications: onshore, shallow water, deep-water, extraction of non-associated natural gas, and extraction in the Chicontepec Paleochannel. - The regional ringfence applies for income tax and no consolidation between entitlements and contracts is permitted. - Note: PEMEX reports a single consolidated number for income tax in financial statements; "it is not clear whether these ringfencing rules are being applied in practice." ### Migration from Entitlements to Contracts - When migrating from PEMEX’s entitlements to contractual regimes, the new fiscal regime is determined by SHCP. - SHCP must ensure income over time for the State is no less than under the entitlement. - Migration determination is driven by SHCP assumptions on future prices, costs, production levels, and discount rate applied to future cash flows. - Recommendation/observation: For added transparency, SHCP might consider making public a brief analysis demonstrating economic equivalence of fiscal terms under entitlement and new contract. - So far, this approach appears to have been applied only to two new PSC contracts. ### Marketing of Production Received in Kind - Production received in kind under production sharing contracts is marketed by a competitively selected state marketer. - Selected marketers (currently Trafigura for oil, and CFEnergia for gas) market petroleum products on behalf of the state and deliver income after deducting service payments. - Service payments: US$0.18 per barrel of oil; US$0.020 per MMBtu of gas sold. - State marketer was selected in December 2017 through a public tender process; contracts and associated commissions are publicly available. ### Allocation of Rights - New areas must be allocated by competitive tender processes conducted by SENER, SHCP and CNH according to best practice in transparency. - SENER selects areas and establishes qualification requirements; SHCP establishes fiscal terms and bid variables; CNH conducts bidding. - Where PEMEX wishes to migrate in partnership with a private company, partner must be selected by public tender carried out by CNH (except for pre-existing service contracts). - CNH awards license contracts through open tender processes with clear pre-qualification and evaluation criteria and independent verification: - Three-stage process with open invitation published in the Official Journal of the Federation. - Geological data made available at pre-qualification stage for a small fee; prequalified list published after at least 90 days. - Bid submission, opening and award: law provides ascending auction, descending auction, or first-price sealed bid auction; in first-price sealed bid auctions, submissions should be received and opened in the same session, presence of a public notary, transmitted live on the Internet, with all final bids and associated scores made public. - Bid awards published in the Official Gazette of the Federation. - Bidding parameters must be economic in nature; SHCP establishes economic variables with minimum and maximum values and tie-breaking rules. - Bid formula used in rounds: weighted average of an additional royalty (for licenses) or the government’s profit share (for PSCs), and any increase over mandatory work program commitments; bidders also submit cash consideration or signature bonus used for tie-breaking. - Since 2014 (except Round Zero), rights allocated by competitive tender; 71 contracts awarded to date under this process. - Winners selected through first-price sealed-bid auction with public opening and disclosure of bid scores and final award. - PEMEX competes on equal basis with other operators for additional contract areas, with specific statutory exceptions where SENER may require PEMEX participation. ### Disclosure of Resource Rights Holdings - Government publishes a database and interactive map of petroleum rights holdings showing allocated/offered areas with start date, status, coordinates, and operator name. - SENER, CNH and FMP publish contracts and entitlement documents; CNH provides interactive contract summaries including project terms, history, investment and production to date. - No formal requirements to disclose beneficial ownership of petroleum contracts: - CNH publishes members of joint venture and the parent company. - Beneficial owners of many companies are publicly listed parent companies; parent company guarantee in the contract provides contact information of parent company offices, but individual names are not disclosed for personal data protection reasons. - As part of the EITI process, authorities plan to publish a beneficial owner registry by 2020: - A roadmap has been developed addressing definition of beneficial owner, level of detail to be published, and navigation of personal data protection laws. - Once established, government could consider public disclosure of the chain of intermediaries between license-holder and ultimate beneficiary. ### Assessment and Collection of Revenues - Clear procedures and guidelines exist for determination of payments under the fiscal regime. - CNH issues guidelines for measurement of production; SHCP publishes guidelines for classification of costs for income tax and fiscal payments; SHCP issues guidance notes on calculation of contractual payments and procurement rules. - SAT provides guidance on its website regarding filing of tax payments by contractors in the petroleum sector. - For contracts, revenue and costs are reported via SIPAC (electronic Information System for Payments by Hydrocarbon Assignees and Contractors) of the FMP: - SIPAC is accessible by contractor and all government entities, providing instant access to production, prices and cost data forming the basis of contractual payments to the FMP. - Contractors make provisional payments for contractual (non-tax) payments to the FMP; FMP reconciles monthly, adjusts, and determines final amount with credit/debit applied in the following month for over/under-payments. - Tax payments are made directly to the SAT. - CNH, SHCP and SAT coordinate audit and compliance: - CNH conducts technical administration and supervision of production and costs, verifies production and price figures, and conducts random audits for production volume and quality verification. - Contractors submit an annual budget plan to CNH for approval; CNH publishes an analysis comparing budgeted costs against international benchmarks (used for ex-post cost verification). - SHCP has a dedicated hydrocarbons unit with specialist sector knowledge, monitors and verifies fiscal payment calculations and can instruct SAT to conduct audits; results of such audits are required to be published by law, although none have been completed and published to date. - Published information on audit and verification of PEMEX’s fiscal payments is limited: - FMP receives payments from PEMEX under entitlements but does not verify calculations. - CNH has authority to audit production and costs reported by PEMEX but does not currently do so. - Authority to audit PEMEX’s entitlement payments lies with SHCP and SAT, but no published audit results are currently available. - The Auditoría Superior de la Federación (ASF) regularly conducts performance audits on specific investments and purchases and on production volume and value measurements, all made public. - With 98 percent of revenue currently derived from entitlements (Figure 4.2), administration of PEMEX entitlement payments should be subject to the same scrutiny and transparency as payments under contracts. - Clear production and cost verification and audit processes at the entitlement level are important given envisaged migration from entitlements to contracts. ### Dispute Resolution and Reconciliation - Contracts contain mechanisms for dispute resolution: first through a conciliator, then arbitration if unresolved. - For income tax, there is a taxpayer’s ombudsman and an administrative appeals procedure for tax disputes. - Authorities reported no disputes on petroleum sector contractual or tax payments since the energy reform. ### Gaps and Outstanding Issues - Resource Revenue Audit and Verification: Not Met - Authorities do not currently produce a report reconciling payments reported by companies and payments received by government. - With significant fiscal payments from private participants anticipated under E&P contracts, regular reconciliation of company payments and government receipts is an important transparent verification mechanism. *Source: cr18289 - 154. All relevant laws, regulations, and contracts are public and easily accessible, and the* ### 174. Aggregated entitlement payments and receipts currently reported by PEMEX and the ### cr18289 - 174. Aggregated entitlement payments and receipts currently reported by PEMEX and the ### Reconciliation of PEMEX and FMP entitlement payments - PEMEX reports payments made for its entitlements in its 20-F SEC filings on an IFRS accruals basis. - The FMP reports payments received from entitlements on a cash basis, which are then reported in budget documents. - As a result, aggregated entitlement payments and receipts currently reported by PEMEX and the FMP do not reconcile due to differing calculation bases. - Table 4.2 (2016 figures) shows differences by payment type (Millions of Pesos): - Exploration Fee: FMP 951 ; PEMEX 963 - Extraction Fee: FMP 41,660 ; PEMEX 43,500 - Profit Sharing Fee: FMP 264,994 ; PEMEX 304,299 - Total: FMP 307,604 ; PEMEX 348,762 - Source for the table: FMP Annual Report, PEMEX SEC 20-F Report. ### Project-level reporting and reconciliation - There is no systematic project-level reporting on company payments or government receipts. - Hydrocarbons Revenue Law requires monthly reporting by SHCP and FMP of fiscal payments on a contract basis for E&P contracts and on a regional basis for entitlements, but in practice FMP reports only aggregate payments by payment type. - For new E&P contracts, some project-level fiscal data is published by CNH. - For income tax and the tax on hydrocarbon exploration and extraction activity (both paid to SAT), SHCP reports a total figure for tax paid by all entitlements and contracts. - Project-level reporting is preferable for enhanced transparency and would be required by both government and companies to conduct a project-level reconciliation exercise. ### EITI candidacy and reporting expectations - Mexico is a candidate country under the Extractive Industries Transparency Initiative (EITI). - The 2013 standard requires a reconciliation of company payments and government receipts, on a cash basis, at a project level; the reconciliation is certified in-country by an independent administrator and validated by EITI’s international secretariat. Any reconciliation error must be explained. - Mexico’s first EITI report is scheduled to be published in 2019. - Under the 2013 EITI standard, payments should be reported by payment type and by ‘project’ (ringfenced basis): PEMEX entitlements should be reported by ‘region’, contracts by contract area; income tax liabilities should be reported according to the applicable ringfence. - Authorities may consider including the state marketer within the scope of the EITI report to capture revenue from sales of Mexican petroleum. ### Company reporting on domestic and worldwide payments - No clear and standardized reporting requirements exist for resource companies operating in Mexico to report payments made to the government. - PEMEX, as the dominant producer, reports total payments to government broken down by fiscal instrument in its SEC filing for all extraction activity in Mexico under entitlements and contracts. - An assessment of reporting by domestically domiciled or listed resource companies with international extraction activities is not undertaken for Mexico in this report; no Mexican legislation mandates project-level reporting on worldwide extraction activity for these companies, and the extent of worldwide operations by Mexican petroleum companies is limited. ### Operational, social and environmental reporting - Social impacts: - Contractors and entitlement holders must undertake social impact assessments before commencement of petroleum activities; these must detail possible social impacts, mitigation measures and social management plans. - For current contracts, social impact assessments are published by CNH with the required authorization by SENER. - Since the requirement applies to new projects, social impact assessments do not appear to have been published for entitlements (mostly existing operations). - Environmental impacts: - Contracts and entitlement holders require submission of an environmental impact assessment before activity can commence. - For contract holders, these assessments are published by CNH along with authorization by ASEA. ASEA publishes a bi-monthly list of assessments received from all economic sectors. - For PEMEX entitlements, assessments submitted before production began do not appear to be publicly available. - Operational disclosure: - For contracts, CNH reports regularly on exploration and production progress, investment data, production levels, and annual work programs. - For entitlements, the same level of detail does not appear available, although production data is reported by CNH by production well. - PEMEX reports production activities in its Statistical Yearbook for selected fields and assets, but not on an entitlement basis. ### Resource revenue management — budgeting and allocation - Petroleum revenues that finance spending are allocated through the annual budget law in accordance with predefined fiscal objectives and clear conditions for deviation. - Petroleum revenues accrue to the public sector in two ways: - PEMEX obtains proceeds from petroleum sales. - Private contractors make payments specified in the fiscal regime to the Budgetary Central Government (BCG) and the FMP. - Mexico’s national oil company (PEMEX) is part of the budget; PEMEX’s expenditure and operational balance are approved by the legislature as part of the annual budget. - The petroleum fiscal regime applies to PEMEX and contractors and specifies flows to the FMP or BCG. The FMP collects contractual payments due to the state (royalties, signature bonuses, exploration fees, profit sharing payments, net proceeds from sales of hydrocarbons received in kind). The BCG collects corporate income taxes, taxes on petroleum exploration and extraction activity, and dividends from PEMEX. ### FMP transfers, thresholds and earmarking - The FMP makes transfers to the budget and may accumulate financial resources; revenue allocation consists of “ordinary” and “extraordinary” transfers. - Ordinary transfers: - FMP transfers resources to the Treasury to ensure that BCG petroleum revenue in a given year is at least 4.7 percent of GDP (its level in 2013). - Amounts transferred are included in budgetary revenue. - Part of transferred resources is earmarked to six extrabudgetary funds—including the FEIP and FEIEF—and to other uses according to specified formulas. - In 2017, 3.8 percent of the revenue transferred by the FMP under ordinary transfers was earmarked. - If FMP resources are insufficient to make transfers specified in the law, the fund must transfer the annual inflow of hydrocarbon payments in its entirety. - Extraordinary transfers: - May be mandated if there is a significant decrease in revenue from a fall in GDP, a marked reduction in the price of oil, or a drop in petroleum production, and if FEIP resources have been exhausted. - If FMP resources exceed 3 percent of GDP, the FMP may recommend allocation of part of the increase in resources in the previous year to four types of expenditures according to specific earmarking percentages, up to 60 percent of the increase. These transfers require legislative approval, must go through the Treasury, and the expenditures are included in the budget. - The remaining 40 percent of the increase must stay in the FMP. - The 60 percent share of annual excess revenues over 3 percent of GDP must be earmarked as follows: 10 percent for the universal pension system, 10 percent for science and technology and renewable energy projects, 30 percent for petroleum projects, and 10 percent for scholarships and regional development. - FMP reserve and reverse transfers: - FMP resources not transferred to the BCG remain in the fund’s reserve. - Returns on the fund’s assets remain in the FMP until the size of the fund reaches 10 percent of GDP; once exceeded, the fund must transfer the annual financial returns in real terms to the BCG. - The fund’s reserve may receive reverse transfers from excess budget revenues relative to the approved budget and discretionary transfers from the BCG. ### Budget oil price mechanism and transparency - The budget oil price is specified by a formula in the LPFRH: an average of three components: - (i) the average price of the Mexican export basket of crudes in the previous 10 years (25 percent weight); - (ii) the average of future prices for WTI crude for delivery at least three years forward from the time estimates are made, adjusted for expected differential with the Mexican export basket (25 percent weight); - (iii) the average of future prices for WTI crude for the next budget year, adjusted as under (ii), and with a discount of 16 percent (50 percent weight). - The government may propose a lower budget oil price than the formula oil price; calculations according to the formula are presented in budget documentation. Congress may adjust the oil price with justification if significant developments occur after the budget proposal. - The application of a discount factor to the average future price for the budget year reflects a precautionary motive to avoid overestimation given oil price volatility. - Historical behavior: - The budget oil price lagged actual oil prices during the latter stages of the oil price boom, and lagged again following the slump before broadly converging in 2017. - Recommendation for transparency: - Budget documentation should include a clear description of the system of petroleum revenue management, explaining the steps from petroleum sales revenue accruing to PEMEX and taxes/dues from private companies, until revenue reaches the BCG or stays at the FMP (including petroleum revenue earmarks mandated by legislation). ### FMP structure, governance and objectives - The FMP is an extrabudgetary trust fund enshrined in law and set up by the SHCP through a contract with the Bank of Mexico as fiduciary manager; fund started activities in 2015. - Legal framework: Law on the FMP, LPFRH, Hydrocarbons Law, Hydrocarbons Revenue Law, PEMEX Law, regulations, agreements, contracts and other publicly available documents. - The SHCP is owner of the fund; the FMP’s Technical Committee (TC) manages the fund; the Bank of Mexico is fiduciary manager. - The FMP’s purpose: receive, manage, invest, and distribute nontax petroleum revenue from entitlements and contracts; objectives include stabilization, long-term savings, and increased transparency. - Composition of the FMP’s TC: - Seven members: the Minister of Finance (presides), the Minister of Energy, the Governor of the Bank of Mexico, and four independent members who must meet required qualifications. - Independent members are proposed by the President to the Senate and must be approved with a two-thirds majority. - Operational costs exception: - The only extrabudgetary spending exception are the costs of the FMP, which include operational costs and fees paid to the Banco de Mexico. In 2016, these costs were MEX 184 million. *Source: IMF Country Report content provided.* ### 197. The functions of the TC and the rules governing its meetings are clearly spelt out in the ### 197. The functions of the TC and the rules governing its meetings are clearly spelt out in the ### Governance and Mandate of the Technical Committee (TC) - The TC’s functions and meeting rules are set out in the Law on the FMP and other public documents. - Selected functions and responsibilities (Box 4.1) include: - Manage the financial aspects of exploration and extraction contracts. - Appoint an Executive Coordinator on the recommendation of the Bank of Mexico. - Approve the financial statements audited by the external auditor. - Approve the fund’s quarterly reports, including the financial statements. - Approve the workplan and the operational expenditure for the following fiscal year. - Request from the Executive Coordinator the provision of projected flows from entitlements and contracts every six months. - Instruct the Bank of Mexico to make the transfers to the Treasury as specified in the legislation. - Define the investment policy and the risk management strategy that the fund’s asset manager (the Bank of Mexico) must implement as regards the fund’s reserve portfolio (the long-term investment portfolio of the fund). - Recommend to the lower house the use of fund resources once the fund’s reserves exceed 3 percent of GDP. - Instruct the Bank of Mexico to make the specified transfers to the Treasury once the fund’s reserves exceed 10 percent of GDP. - Issue an opinion on the proposed PEMEX dividend to the government. - Approve agreements of cooperation and technical assistance (with SHCP, SAT, CNH, and SENER). ### Conflict of Interest and Fiduciary Management - The TC has issued guidelines to avoid conflict of interest in the Bank of Mexico as fiduciary manager of the fund. - Guidelines address potential conflicts between: - Operations the Bank carries out for the FMP and operations it carries out for itself. - The Bank’s role as fiduciary manager of the FMP and its role as central bank. - Key principles/practices required by guidelines: - Administrative units that carry out the Bank’s operations and the units that carry out operations for the FMP cannot depend directly from each other. - Physical and structural separation between these units. - Separate management of information. ### Revenue Registration and Financial Programming - The FMP maintains a detailed registry of payments received from each contract and each entitlement. - The registry currently comprises 71 contracts and 428 entitlements. - The FMP carries out financial programming exercises twice a year: - In the fourth quarter, projections for the cash flow for that quarter and the next year are produced. - Projections for the current year are updated in the second quarter. ### Audits, Controls, and Oversight - Annual financial statements are externally audited by the Bank of Mexico’s external auditor. - The Auditoría Superior de la Federación (ASF) has performed several financial, performance, and compliance audits, including: - 2015 combined audit of the role of the FMP and FEIP in public finances; it found the outlook for accumulation of resources in the FMP was unfavorable given the statutory requirement to transfer the equivalent of up to 4.7 percent of GDP to the government each year, and prospects in the international oil market. - The Bank of Mexico’s audit office carried out a performance and compliance audit covering risk control, financial management, managerial procedures, contract payments, and accounting practices. - The fund’s Internal Controller reports to the TC on internal audit results. ### Transparency, Reporting, and Publications - The Law on the FMP mandates publication of quarterly reports one month after the end of the quarter and specifies minimum information to be provided. - Minutes of TC meetings are published subject to deletion of specified sensitive information. - The Law on Hydrocarbons Revenue stipulates the information the FMP, in coordination with the SHCP, must publish for each contract (or each specified producing region under entitlements) and in aggregated form, as well as information on revenues and expenditures. - The FMP’s website publishes, inter alia (Box 4.2): - Legal framework, regulations, guidelines, nature of the fund, and current composition of the TC. - Quarterly and annual reports with detailed inflows by types of petroleum revenue collected and outflows (including transfers by recipient), information on contracts, operational costs, yield on the fund’s assets, and management fees paid to the Bank of Mexico. - Monthly financial statements and annual externally-audited financial statements. - Annual workplans and information on operational costs (previous year and projections for the current year). - Individual contracts registered with the FMP (currently: 71 contracts), migrations, and associations. - Separate monthly data for entitlements and for contracts: volumes produced, proceeds from sales, operational costs, and investment. For entitlements, fiscal take accruing to the FMP is reported; for contracts, the payments to the FMP and to the contract holder are reported. Information is available for each region and in aggregate form (entitlements) and for each contract and in aggregate form (contracts). - Monthly data on transfers to the Treasury. - Disclosures of personal interest of TC members. - Minutes of TC meetings, subject to deletion of sensitive information. ### Fund Operations, Recent Flows, and Investment Strategy - To date, transfers to the BCG have been insufficient to ensure oil revenues equivalent to at least 4.7 percent of GDP in the budget. - Revenues collected by the fund have been of the order of 1½-2 percent of GDP, and they were all transferred to the budget. - In late 2017, there was a reverse transfer to the FMP equivalent to 0.1 percent of GDP from excess budgetary revenues for the fund’s reserve portfolio. - Asset accumulation to date is small; all assets accumulated were in late 2017. - Asset allocation to date: accounts at the Bank of Mexico and some accounts in domestic and foreign currency with private banks. - The FMP’s reserve portfolio objective: - Funded with resources left in the FMP once required transfers to ensure petroleum revenue in the budget is 4.7 percent of GDP have been made (net of extraordinary transfers), and with excess resources that the BCG may transfer to the fund when actual budget revenues exceed budgeted revenues. - The FMP published the Guidelines for the Investment Policy and Risk Management of the Fund’s Reserve on February 14, 2018. - The guidelines set general strategy and risk management for the reserve portfolio. - Investment principles: seek maximum return subject to an adequate level of risk; risk diversification aligned with the country’s macroeconomic policy. - Eligible financial assets include sovereign bonds, inflation-indexed sovereign bonds, corporate bonds, and stocks—subject to TC-determined investment objectives. - Strategy must set exposure limits by asset class, country, region, and economic sector. - Use of derivatives may be considered solely to facilitate implementation of investment and risk management policies. - Strategy specifies range of qualifying financial assets, permitted currency denominations, minimum credit ratings for fixed-income assets, and minimum credit qualifications for counterparties. - Returns will be compared with a benchmark portfolio to be defined by the TC; a maximum tracking error will be specified by the TC. - External asset managers must abide by the risk limits and will be evaluated on performance. - Identified operational needs: - Operationalize strategy into clear investment guidelines covering targeted asset shares, regional/country distribution, currency composition, risk profile, maximum exposure to any one asset, specific investment limits, and fixed-income duration. - Specify the benchmark portfolio using well-defined market indices and define maximum tracking error. - Publish operational investment guidelines and the benchmark portfolio, and provide comprehensive and regular financial reporting on investment performance, assets, returns, comparisons with benchmarks, financial position, risk profile, and compliance with operational investment guidelines. - Short-term liquidity management: - Legislation requires the FMP to maintain current accounts at the Bank of Mexico to receive, manage, and distribute petroleum revenues assigned to it; these accounts must not be allowed to go into overdraft. ### Assessment Conclusions and Recommendations (selected) - Mexico meets advanced fiscal transparency practices for seven principles of the draft fourth pillar of the Code: clear legal and fiscal framework, open and competitive rights allocation and disclosure practices, all petroleum revenues accruing to the federal budget and FMP, clear governance arrangements, quarterly and annual reports and financial statements. - Areas needing attention and recommendations include: - Continue implementation of the EITI standards; the first EITI report is expected in 2019 and will provide project-level reporting by all resource companies and a reconciliation with government receipts. Authorities should progress on plans to require petroleum companies to report details of their ultimate beneficiaries. - Strengthen reporting and oversight of PEMEX’s activities under the entitlement regime: - Introduce more rigorous audit and verification of PEMEX reported production and costs. - As a step towards EITI compliance, PEMEX should report payments made to the government under entitlements on the ‘regional’ basis by which they are ringfenced and calculated. - Require regular environmental, social and operational reporting on activity in entitlement areas. - Recommendation 4.1: Oversight and reporting on activity under PEMEX entitlements should be strengthened. - Operational investment guidelines: - The possibility of larger future petroleum revenues underscores the importance of clear and published operational investment guidelines for the FMP. - Recommendation 4.2: The FMP should publish the benchmark portfolio that operationalizes the investment guidelines after it is issued by the TC, as well as the risk management policy to limit deviations from the benchmarks. - Other recommendations: - For PEMEX entitlements migrating to contracts without a tender, SHCP could publish a brief analysis demonstrating the economic rationale behind the new contractual fiscal terms. - Budget documentation should include a one-stop description of the system of petroleum revenue management, explaining flows from PEMEX sales and taxes and dues paid by contractors, through the FMP, finalizing in the BCG and earmarks mandated by legislation, or remaining at the FMP for asset accumulation. The system of mutual transfers between the FMP and the BCG should be clearly explained. *Source: FMP; SHCP; ASF; Bank of Mexico; IMF staff calculations as presented in the cited chapter.* ### Appendix I. Mexico FTE Recommendations: Action Plan 2018-2021 ### Appendix I. Mexico FTE Recommendations: Action Plan 2018-2021 ### Pillar I – Fiscal Reporting: Objective 1. Improve coverage (institutions, stocks and flows) of fiscal reports to provide an accurate view of Mexico’s financial position and fiscal performance - Consolidate the general government and the public sector in the fiscal reports in accordance with international standards. - 2018: - Present available fiscal data of subnational governments in the Quarterly Fiscal Report (initially on annual basis). - Develop a web-based system for submission of detailed fiscal data by states and municipalities. - Include FMP in Cuenta Pública. - CONAC approves a time frame for consolidation process at national level. - 2019: - Consolidate subnational finances in the PSBR and SHRFSP fiscal indicators. - Consolidate volumes (Tomos) II, VII and VIII of Cuenta Pública in a new volume to present statements for the consolidated federal public sector. - 2020: - Disseminate fiscal statistics for the consolidated general government and public sector on a quarterly basis in accordance with international standards as recommended by the G-20 Data Gaps Initiative. - 2021: - Include the accounts of states, municipalities and the Banxico in Cuenta Pública in order to consolidate the entire public sector. - Responsible agency: SHCP - Improve the coverage of stocks and flows in fiscal reports, by including missing assets, liabilities and fiscal flows. - 2018: - Include stock of T-bonds issued to Banxico in debt statistics (gross debt, net debt, SHRFSP and PFN). - Apply nominal value as valuation method of T-bonds. - Correct the asymmetric treatment of FEIP’s oil hedging program transactions and adjust the PSBR calculation. - Include the accrual of interest on discounted T-bonds in fiscal statistics. - 2019: - Include in Cuenta Pública: (i) oil reserves at present value; (ii) employment-related pension liabilities; (iii) PPP liabilities in line with IPSAS 32 standard; (iv) flows of net accrual of employment–related pension liabilities and accrued expenses under PPP arrangements. - 2020: - Improve the valuation of fixed assets in Cuenta Pública, especially highways infrastructure. - Responsible agency: SHCP ### Pillar I – Fiscal Reporting: Objective 2. Ensure publication of fiscal data conforming to international standards to enhance fiscal policy analysis and strengthen the credibility of fiscal reports - Start publishing fiscal statistics by economic and functional classifications compliant with international standards. - 2018: - Include more detailed statistical tables for reporting on the RFSP aligned with the GFSM 2014 economic classification in the 2019 budget documents and 2018 quarterly fiscal reports. - 2019: - Publish detailed fiscal statistics by economic classification fully aligned with the GFSM2014 by using the bridging tables. - Develop a bridging table to produce COFOG-compliant reports and publish these reports. - Responsible agency: SHCP ### Pillar II – Fiscal Forecasting and Budgeting: Objective 3. Strengthen the government’s ability to plan public expenditure over the medium term - Improve the medium-term fiscal framework and the medium-term budget framework. - 2018: - Develop the Pre-Criteria report for 2020 budget into an annual Fiscal Strategy Statement, with a medium-term perspective. - Establish a process for separating the cost of new policy proposals from spending baselines, and for making forward estimates of spending over a 3-year period. - Develop a system for using systematically key performance indicators in budget negotiations with spending entities. - 2019: - Publish in the budget documents medium-term projections of spending on the same (or slightly reduced) level of detail as the annual budget. - 2021: - Set indicative ceilings for spending ministries and programs over the medium term, starting from 2021 budget. - Responsible agency: SHCP ### Pillar II – Fiscal Forecasting and Budgeting: Objective 4. Improve the credibility of macro-fiscal forecasts, and compliance with fiscal targets and fiscal rules - Establish stronger mechanisms for the independent validation of the government’s macroeconomic and fiscal forecasts, and compliance with fiscal targets and rules. - 2018–2019: - Take a decision on the most suitable options for independent validation. - 2020: - Implement the chosen independent validation process for the 2020 budget. - Responsible agency: SHCP ### Pillar III – Fiscal Risk Analysis and Management: Objective 5. Improve the analysis of macroeconomic and other risks - Deepen and extend the SHCP’s macroeconomic risk analysis. - 2018–2019: - Subject the baseline scenario in GCEP to larger and combined shocks. - Present alternative macroeconomic and fiscal scenarios. - 2020–2021: - Extend analysis to include impact of exogenous shocks on fiscal outcomes and the impact of combined macro and specific fiscal risk shocks. - Responsible agency: SHCP ### Pillar III – Fiscal Risk Analysis and Management: Objective 6. Quantify and disclose information on the main specific fiscal risks - Prepare an annual report that quantifies specific fiscal risks, and an associated mitigation strategy. - 2018: - Develop a clear methodology to identify and quantify the main specific risks, and a strategy to mitigate these risks, in consultation with relevant stakeholders. - 2019–2020: - Establish a risk management unit within the SHCP to prepare and publish summary reports on specific risks, and develop/implement a strategy for managing risks. - Responsible agency: SHCP ### Pillar III – Fiscal Risk Analysis and Management: Objective 7. Establish a comprehensive framework for the financial oversight of non-financial public corporations - Develop a framework covering the ownership policy of PCs, financial targets and reporting, and the disclosure of QFAs. - 2018: - Establish a comprehensive list of non-financial PCs which meet the GFSM criteria, and prepare a framework for their financial oversight. - 2019: - Set up a unit in the SHCP responsible for implementing and enforcing the financial oversight regime, and for developing a monitoring / early warning system. - 2020–2021: - Publish a consolidated report on PCs’ financial performance and QFAs in the budget documents, and SHCP’s quarterly reports. - Responsible agency: SHCP ### Pillar III – Fiscal Risk Analysis and Management: Objective 8. Publish long-term projections of public finances - Prepare long term projections for the public finances. - Budget documents should include long-term projections of public finances, for at least the next 10 years, which could be updated every few years. - Publish first long-term projections in GCEP. - Responsible agency: SHCP ### Pillar IV – Resource Revenue Management: Objective 9. Ensure greater transparency over PEMEX activities - Strengthen oversight and reporting on activity under PEMEX entitlements. - 2018: - PEMEX to report on payments made to the government under entitlements on a ‘regional’ basis. - SAT, SHCP and CNH to publish clear procedures for audit and verification of PEMEX reported production and costs. - Publish social and environmental impact assessments relating to new activity under PEMEX entitlements. - 2019–2021: - Publish annual work programs relating to PEMEX entitlement operations. - SAT, SHCP and CNH to publish an annual report on results of audits of entitlement payments. - Responsible agencies: CNH, SAT, SCHP ### Pillar IV – Resource Revenue Management: Objective 10. Introduce a clear operational investment strategy for the FMP - Publish the FMP’s benchmark portfolio that operationalizes the investment guidelines. - FMP to publish the benchmark portfolio after it is issued by the TC. - FMP to publish the risk management policy. - Responsible agency: FMP ### Appendix II. Relationship Between the SHCP and Banxico — Key findings and transparency recommendations - Summary of operations and fiscal impact: - Relevant capital transfers from the bank to the federal budget in 2016 and 2017 of around 1.2 and 1.5 percent of GDP, respectively. - A stock of T-bonds sold to the market by Banxico that accounted for 4.9 percent of GDP at the end of 2016. - A stock of around 20 percent of GDP in non-marketed T-bonds held by the Banxico by end-2016. - How Banxico uses T-bonds for liquidity and monetary policy: - SHCP issues T-bonds to Banxico upon request; Banxico matches T-bond purchases with deposits in a restricted account at Banxico equal at face value, terms and yield to the securities. The restricted account is separate from the fiscal TSA. - Banxico sells T-bonds to the market (auctions on a weekly basis following a pre-established schedule) to reduce liquidity. Once sold, SHCP is responsible for redeeming them at maturity, but Banxico bears the interest bill. - By end-2016: - The stock of T-bonds sold by the bank amounted to about 4.9 percent of GDP. - Banxico’s non-marketed T-bonds holdings reached around 20 percent of GDP. - From 2011 to 2016: - The stock of T-bonds managed by Banxico under the monetary policy framework, marketed and non-marketed, increased from 13 percent of GDP in 2011 to 25 percent in 2016. - Banxico capital transfers (ROBM) and profit drivers: - Part of Banxico’s gains are transferred to SHCP as ROBM. - Banxico’s earnings are not separated between revaluation (exchange rate variation) gains and current operations gains; transfers can include unrealized gains from revaluation of FX reserves. - Since 2014, Banxico’s profits averaged about 2.1 percent of GDP a year, entirely driven by volatile unrealized gains from the revaluation of FX reserves. - Legal amendment since 2015 (article 19 bis of the LFPRH): 70 percent (at least) of the ROBM is used to redeem government debt and 30 percent (at most) to improve the federal government’s financial position. - This treatment of unrealized profits affects debt dynamics positively but may negatively affect the bank’s capital. - Differences in accounting and statistical treatments that affect transparency and comparability: - Official debt statistics (gross debt, net debt, HBPSBR, PFN) do not include: - the stock of T-bonds sold by Banxico, nor - the treasury securities held by the bank (non-marketed), - although GFSM treats T-bonds as central government (or general government, GG) debt regardless of how they were sold. - Accounting practice differences: - In Cuenta Pública: - T-bonds issued by SHCP to Banxico under monetary policy framework are recorded as a liability (not debt) at face value and the corresponding deposit in the restricted account as an asset by the same amount. - In Banxico’s financial statements (NIFBdM): - When bank purchases T-bonds, an asset at face value is added and the restricted account of SHCP is added as a liability; both are revaluated at market value daily. - When the bank sells securities to the market, assets are eliminated and monetary base reduced by the same amount. - Stock of non-marketed treasury securities held by the bank is removed from assets and the restricted account reduced by the same amount in a “consolidation” procedure. - Such netting-out recording undermines transparency of the accounts and complicates assessment of the financial position of the bank and the dynamics of government net debt. - Treatment of ROBM in fiscal statistics: - ROBM transfers are treated as fiscal revenues, positively affecting the traditional balance and the PSBR indicator, which conflicts with GFSM 2014 recommendations. - GFSM 2014 guidance: - Profits due to current operations of central banks transferred to government should be recorded as dividends. - Compensation of losses due to current operations should be recorded as subsidies to public corporations. - One-off payments based on holding gains should be recorded as withdrawals of equity (compensations for holding losses as equity injections). - Recommendations to improve transparency and international comparability: - Align accounting and statistical treatments of transactions between SHCP and Banxico with international standards (GFSM 2014) to improve transparency of key fiscal aggregates such as public debt and primary/overall fiscal balances. - Publish and include in official debt statistics the stock of T-bonds sold by Banxico and treasury securities held by Banxico, consistent with GFSM treatment of central government debt. - Distinguish in reporting Banxico’s realized vs. unrealized gains and losses, and apply GFSM-consistent treatment for transfers to government (dividends, equity withdrawals/injections, or subsidies as appropriate). - Improve disclosure around the restricted account balances and the gross position of T-bonds under the monetary policy framework to reduce opacity created by netting-out procedures. *Appendix I. Mexico FTE Recommendations: Action Plan 2018-2021 (CR18289) — IMF PDF chapter* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18289.pdf_